A frequent question that arises in federal government contracts and, in some instances, also in state public works contracts is: what is the difference between a “claim” and a “request for equitable adjustment” (“REA”)? There is not a lot of precedent in state law that defines a distinction between “claims” and REAs, thus, federal law provides insights on the differences.[i]
a. “Claim” Defined in FARs. In federal law, a claim is well defined in FAR §2.101 as:
“A written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. However, a written demand or written assertion by the contractor seeking the payment of money exceeding $100,000 is not a claim under the Contract Disputes Act of 1978 until certified as required by the Act.”
As indicated, a claim that exceeds $100,000 must be submitted to the Contracting Officer in a manner that clearly provides the factual, technical and legal basis for an equitable adjustment to the contract. Whether the claim exceeds $100,000 or not, the best practice is to identify the request as a claim under the Contract Disputes Act of 1978, 41 U.S.C. 601-613, together for a request for a Contracting Officer’s Decision (COD). When those procedural steps have been complied with, the interest clock starts running from the date the claim is submitted. The term “equitable adjustment” appears in the FARs in 111 places, and the term “request for equitable adjustment” appears in 11 places. That being said, there is no definition provided for the words “request for equitable adjustment” in the FARs, or anywhere else. Regardless, an REA is commonly understood to be a request for compensation (of money, time, or both) that falls short of a “claim” in terms of its procedural requirements.
b. REA distinguished From Claim. An REA does not require a certification under the Contract Disputes Act.[ii] There are a number of FAR clauses that allow an equitable adjustment to the contract if the government is responsible for additional costs, or time. The most significant clauses are:
- Variation and Estimated Quantity (VEQ), FAR 52.11-18
- Differing Site Conditions (DSC), FAR 52.236-2
- Suspension of Work (SoW), FAR 52.42.14
- Changes – Fixed Price (Changes), FAR 52.243-1 and
- Termination for Convenience (T for C), FAR 52.249-2
In general terms, an equitable adjustment means that the contractor is entitled to its costs, plus reasonable profit (except for suspensions and profit on uncompleted work with regard to termination for convenience) and overhead. The additional costs must be allowable, allocable and reasonable.
Another difference between REAs and claims is that, in REAs, claim preparation costs are generally considered part of the contract administration cost and, therefore, compensable.[iii] Thus, the distinction between a claim and an equitable adjustment is that if the contractor submits the extra work as a “claim,” a contractor is entitled to the interest, but not claim preparation costs. If, however, the extra work is submitted as a request for equitable adjustment, the contractor is entitled to compensation for its claim preparation costs, but not interest.
Comment: Interest rates are presently extremely low (1.35% per annum on government claims) as of the posting of this blog. Claim preparation costs, experts, and attorneys’ fees, seem to more than keep up with the rate of inflation, and are generally higher than the statutory interest expected on most construction claims. Therefore, if an extra work issue arises, the contractor should consider whether it is in its interest to not immediately certify a claim, but instead submit a request for equitable adjustment in which the contractor’s claim preparation costs are compensable. In today’s low interest environment, it generally is in the contractor’s interest, particularly if it appears that the government will settle a demand for the extra payment to submit the payment as an REA, and, rather than certify it as a claim, forgo the interest but include the claim preparation costs as part of the REA submission.
Finally, though most of the legal authority in the blog pertains to federal contract claims and requests for equitable adjustment, the same argument can be made in state public works contracts that use the same term “request for equitable adjustment” in various contract provisions. Since state courts will look to federal courts for precedent if there is no precedent in state court, it is likely that a state court will be persuaded by the same logic that exists in federal contracts on a state public works project.
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[i] This post is based in part on the Federal Construction Contracting Blog (3/26/13), an excellent resource for up to date federal government contracting news and developments.
[ii] REAs submitted to the Department of Defense require the certification found in DFARS 252.243-7002.
[iii] Build Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed Circ. 1995); See also Tip Top Construction, Inc. v. Donahoe, No. 2011-1509, 2012 W.L. 4094851 (Fed Circ. September 19, 2012) (holding a contractor’s consultant costs and attorneys’ fees incurred in negotiations over the price of a change order is an administrative cost compensable by an equitable adjustment).