The United States Law Week

INSIGHT: Avoiding Scope Creep, Cost Overruns on Fixed-Price Contracts

June 12, 2019, 8:01 AM

Government contractors are well-aware that, under a fixed-price contract, they typically bear the risk of cost overruns that exceed the contract’s fixed-price.

Often the best way to minimize the risk that they will sustain a loss under a fixed-price contract is to develop and implement robust estimating and pricing processes and procedures that will help the contractors avoid overruns in the first place.

These processes and procedures should be aimed at ensuring the contractors’ proposed prices for fixed-price contracts are based upon a complete understanding of the required work and costs that the contractor will incur to perform it.

Cost overruns, however, remain a fact of life. Even the most sophisticated contractors with the most up-to-the-minute estimating and pricing systems will still incur cost overruns that can impact profits and bottom lines. The key to ensuring that the contractor is not left holding the bag is to identify overruns in real-time and take immediate action.

Things to Monitor

Contract administrators, as well as the responsible program and project managers, should carefully monitor at least two things:

  1. Any government-directed changes to the agreed-upon scope of work (often referred to as “scope creep”); and
  2. Any material deviations between the contractor’s incurred cost to perform and the cost estimate upon which it based its proposed price.

While identified scope creep and cost estimate deviations both require close monitoring, they each may require unique responses during contract performance.

If a change to the scope of work is identified, it is then typically best practice to establish a charge code to specifically track the costs resulting from the change. This will enable the contractor to determine if the change has a material cost impact that is worth attempting to recover through the request for equitable adjustment or claims process.

The clear and distinct accounting will also help the contractor avoid the inherently imprecise estimating process in the future, that could increase the risk that the government will reject such an estimate.

The contractor will also want to assess whether the identified scope creep actually constitutes a change to the contract. This could involve complicated questions of contract interpretation that require the contractor to review its bid and proposal files.

Organized Records Are Key

It is thus critical that the contractor develop complete, well-organized files during the bid and proposal process, and that it retains those files throughout performance. The contractor’s files should also include documentation of the government direction at issue. This will help the contractor assess the strength of its position that the government employee who directed the change was authorized to do so—which is often a disputed issue in change cases.

In contrast, if a material deviation from the cost estimate is identified and the reasons for it are not apparent, the next step is likely to be an investigation to determine the cause of the overrun. The contractor will want to ascertain whether the overrun results from an unexpected event, a mistake it made in its cost estimate, a government-directed change, or some other cause.

Once the cause of the overrun is determined, the contractor can then assess legal doctrines that may entitle it to pursue recovery of the overrun. This also could involve review of the company’s bid and proposal files. Retaining those detailed, organized records is again of key importance.

Talk to the Government

In all cases, it will almost always be advisable to engage the government on the issue as soon as possible. Even if the government disagrees with the contractor’s position, early discussion with the government increases the likelihood that the dispute will be quickly resolved and without resorting to costly and attenuated litigation.

In contrast, allowing issues to fester can increase the chance that litigation will be required to resolve the dispute. Any required litigation will occur long after the events in question, increasing the chance that key witnesses—on both the government and contractor sides—will have moved on to new responsibilities or even to entirely new jobs.

It can also make finding relevant documents far more time-consuming and expensive. All of this can significantly impair the parties’ ability to bring the issues to an amicable resolution.

Successful contract performance is in the interest of both the contractor and the government, as long and litigious disputes often yield no real “winner.” And, when dealing with fixed-price contracts, early detection of scope creep and cost overruns—coupled with robust recordkeeping policies and practices—can make the difference between success and failure.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jason Workmaster is a member at Miller & Chevalier. He focuses his practice on government contracts-related litigation, including contract claims and disputes, bid protests, and civil FCA cases.

Abigail (Abi) Stokes is counsel at Miller & Chevalier. She focuses her practice on all aspects of government contracts-related compliance and litigation and has significant experience navigating the defense federal acquisition system.

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