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COFC: Contractor Stuck With Bill For Substantially Higher Than Expected Costs Under Firm-Fixed Price Requirements Contract

A recent Court of Federal Claims decision serves as a reminder to contractors of the perils of firm-fixed-price contracts in unpredictable environments.

The case, Agility Defense & Government Services, Inc. v. United States, involved an “unusually high-risk” firm-fixed-price requirements contract between Agility Defense & Government Services (“Agility”) and the Defense Reutilization Management Services (“DRMS”).  Under that contract, Agility agreed to dispose of all surplus military property at six locations in Afghanistan, Kuwait, and Iraq, regardless of quantity.  In exchange, Agility received $45.2 million and the right to the proceeds of sales of scrap material from the surplus property.  In the solicitation process, DRMS provided offerors historical workload information for each of the six locations, but declined to provide workload projections or estimates.  From the start, the actual workload at almost every location was much greater than the historical baseline. Agility sought to recover $6.9 million in additional labor costs through an equitable adjustment on three different theories: (1) that a constructive change occurred; (2) that the historical information provided to offerors constituted a “negligent estimate;” and (3) that DRMS breached the warranty of reasonable accuracy in the solicitation phase.

The court rejected all three arguments.  Agility’s constructive change, negligent estimate, and breach of warranty theories failed, the court reasoned, because the Government’s decision to provide objective, accurate historical data rather than projections of inherently unpredictable troop movements was reasonable.  The court found no evidence that the Government possessed superior estimates that it withheld from offerors.  The court further emphasized that although the contract posed “a higher than normal risk” to Agility, it was a risk Agility voluntarily chose to bear.  And it noted that the increased workloads were mitigated somewhat by the more than $44 million in scrap proceeds Agility received over the course of the contract.

The Agility decision sends a clear message: a contractor operating under a firm-fixed-price requirements contract will likely have to foot the bill even where costs turn out to be dramatically higher than expected, absent negligence or other fault on the part of the Government.  Contractors competing for such contracts in high-risk, unpredictable environments should pay particularly close attention to the cost inputs that inform their bids, and any price adjustment clauses in the contract that might allow for recovery of higher-than-anticipated costs.

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© 2021 Covington & Burling LLPNational Law Review, Volume V, Number 233
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