Federal Circuit Distinguishes Between Allowable and Unallowable Attorney's Fees Under the Federal Claims Procedures

Unlike private construction contracts, in which a contractor’s recovery of attorney’s fees is typically limited to those incurred in litigation, a contractor on a federal government project may be able to recover legal fees incurred in preparing, submitting, and negotiating change orders as “contract administration costs.” The FAR and cases interpreting it have long provided for disallowance of legal and consultant fees incurred in connection with pursuit of a request for equitable adjustment or lawsuit, but the recovery of contract administration costs incurred in negotiating changed work has frequently been allowed. The Federal Circuit’s decision last week in Tip Top Construction, Inc. v. Donahoe, No. 2011-1509, 2012 WL 4094851 (Fed. Cir. Sept. 19, 2012), helped define the circumstances under which a party may recover its attorneys’ fees under the federal change order procedures.

Tip Top Construction, Inc. was hired by the United States Postal Service for an air conditioning repair project in the Virgin Islands.  The Postal Service required Tip Top to perform additional work to complete the project.  While the Postal Service approved the change order to perform the additional work, Tip Top incurred other additional costs, including attorneys’ fees and outside consultant fees, to submit its proposal and negotiate the pricing of the changed work.  Tip Top included these fees in its claim for equitable adjustment resulting from the change order.  The Postal Service denied the claim, and Tip Top appealed to the U.S. Postal Service Board of Contract Appeals. The U.S. Postal Service Board of Contract Appeals upheld the Postal Service’s denial, stating that the outside attorney and consultant costs included in the claim were “solely directed at trying to convince the contracting officer to accept [Tip Top’s] figure for the change and maximizing [Tip Top’s] monetary recovery,” and therefore, “had nothing to do with the performance of the changed work or genuine contract administration.”

On appeal, the Federal Circuit disagreed. Citing to its earlier decision, Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995)—which held that consultant and legal fees incurred in negotiating the price of the change order are recoverable as contract administration costs under the FAR—the Federal Circuit held that the definitive issue is whether the attorneys’ and consultant costs are general contract administration costs, and, therefore, recoverable, or claim preparation costs which are not recoverable. 

In distinguishing between these categories of costs, the Federal Circuit stated that the Court must “examine the objective reason why the contractor incurred the cost.”  Costs incurred for the “genuine purpose of materially furthering the negotiation process” are contract administration costs, which are recoverable, “even if negotiation eventually fails.”  However, costs “to promote the prosecution of a CDA claim against the Government” are not recoverable.  Applying these principles to the facts of the case, the Federal Circuit held that the consultant costs and attorney fees at issue were recoverable contract administration costs.  This was because Tip Top and the Postal Service negotiated over the pricing of the changed work, expressly leaving open for further negotiation the issue of the price of the changed work in order to avoid litigation. The Federal Circuit stated that “[s]imply because the negotiations related to the price of the change does not serve to remove the associated costs from the realm of negotiation and genuine contract administration costs. Consideration of price is a legitimate part of the change order process. In holding otherwise, the Board, we believe, erred.”

Tip Top confirms that attorney and consultant fees incurred for change orders may be recoverable up until the point an actual claim is submitted by a contractor, especially in cases where the costs emanate from a desire to negotiate an amicable resolution to the change order dispute. Contractors would be well-advised to seek legal assistance with submitting and negotiating change orders on government projects - the cost for this assistance may be recoverable.