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How to File a Request for Equitable Adjustment (REA) or Claim in Government Contracts
by Christoph Mlinarchik, JD, CFCM, PMP | Owner, www.ChristophLLC.com
Strangely enough, the Contract Disputes Act of 1978 (CDA) does not define its most important term—“claim.” As a result, courts look to the Federal Acquisition Regulation (FAR) for guidance. FAR 2.101 defines a claim 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 a contract.” Superficially, this definition resembles a Request for Equitable Adjustment (REA). However, there are subtle yet consequential distinctions between claims and REAs.
REAs are usually in writing, but this is not a requirement. Like claims, REAs often seek from the Government “the payment of money in a sum certain,” “as a matter of right.” REAs are typically based on a standard FAR clause in the contract, such as the Changes Clause. For example, a contractor asserts that the Contracting Officer’s modification to the technical specifications increases the costs of performance by $350,000, to which the contractor is entitled under the Changes Clause. If there is a disagreement about the REA calculation, the negotiation is solely between the Contracting Officer and the contractor, and it is not necessarily an adversarial process.
In contrast, claims under the CDA are more formal and have multiple avenues of judicial appeal. Claims, unless negotiated and settled, form the basis of adversarial litigation in a federal court of law. To encourage settlement, all claims must originate with the Contracting Officer, who delivers a Contracting Officer’s Final Decision. The contractor may appeal the Contracting Officer’s Final Decision to either the Board of Contract Appeals (BCA) or the United States Court of Federal Claims (CFC). In either venue, the appellate bodies are the United States Court of Appeals for the Federal Circuit and then the Supreme Court of the United States, the highest law of the land.
REAs need not involve the judicial branch at all, and ideally, they will be resolved promptly and amicably. REAs can be resolved by a friendly discussion over the phone that is formalized in a bilateral modification to the contract. CDA claims, on the other hand, often turn into contentious, expensive, and time-consuming legal battles.
REA and claim: categorically different?
Vern Edwards, a well-known commentator in Government contracts, asserts that there is no categorical distinction between REAs and claims. According to Mr. Edwards, “REAs are documents with many kinds of content. An REA that possesses the necessary attributes of a claim is a claim. An REA that lacks any necessary attribute of a claim is not a claim. Thus, whether a document requesting an equitable adjustment is or is not a claim depends on its content, not what the parties call it.” Postscript: Requests for Equitable Adjustment vs. Claims, 26 The Nash & Cibinic Report, ¶42.
Mr. Edwards posits that REAs and claims are not mutually exclusive, and that some REAs qualify as a claim under the CDA. This is a logical position that finds no disagreement in the FAR or statutes. However, the Defense Federal Acquisition Regulation Supplement (DFARS) specifically delineates between REAs and claims when it describes their respective certification requirements: “The certification [for REAs] is different from the certification required by 41 U.S.C. 7103, Disputes.” DFARS 243.204-71(c). In any case, sloppy interpretations and lack of knowledge by Contracting Officers and contractors provide ample uncertainty and confusion about the relationship between REAs and claims.
Ralph Nash, Professor Emeritus at George Washington University and author of seminal treatises on Government contracts, disagrees with his respected colleague and fellow writer for The Nash & Cibinic Report. Professor Nash laments that confusion on this topic wastes valuable resources, highlighting a case wherein a contractor’s REA was appealed to the Court of Claims even though it was not certified as a claim. As the Court of Claims’ jurisdiction is to review claims under the Contract Disputes Act, not REAs, the case was dismissed, after a lengthy and expensive legal process had already wasted time and resources of both the Government and the contractor. Agility Defense & Government Services, Inc. v. U.S., 103 Fed. Cl. 366 (2012). Had the Contracting Officer informed the contractor that a REA is different from a claim and explained the necessary claim certifications and consequences thereof, both parties could have avoided a fruitless lawsuit. Instead, due to ignorance of the law, both parties came out looking foolish. As Professor Nash recommends, “It’s about time for everyone to learn the difference between an REA and a CDA claim.” Postscript: Requests for Equitable Adjustment vs. Claims, 26 The Nash & Cibinic Report, ¶42.
Professor Nash is firmly entrenched in the orthodox position, which is that “REAs and claims are distinctly different documents.” Requests for Equitable Adjustment vs. Claims: Is There a Difference?, 26 The Nash & Cibinic Report ¶10. Mr. Edwards, a close friend of and frequent co-author with Professor Nash, rejects this position, noting that “The validity of any categorical proposition that a particular REA is or is not a claim depends on the facts.” Postscript: Requests for Equitable Adjustment vs. Claims, 26 The Nash & Cibinic Report, ¶42.
This is a hair-splitting academic controversy that is unlikely to be settled with finality. Professor Nash is in good company when he makes the commonsense observation that a REA is different from a claim. As he puts it, “An REA and a claim have different consequences.” Requests for Equitable Adjustment vs. Claims: Is There a Difference?, 26 The Nash & Cibinic Report ¶10. This is demonstrably true, yet Mr. Edwards’ claim, to pardon the pun, cannot be refuted as he states it. Indeed, a REA can be written to instantly qualify as a CDA claim, and this provides an excellent learning opportunity to emphasize the substantive differences between the two.
Allowable cost differences
Besides the adversarial and litigious nature of a CDA claim, another reason contractors may prefer to proceed under a REA is allowable cost concerns. Under the so-called “American Rule,” which actually derives from Anglo-Saxon common law, parties to a lawsuit must pay their own litigation costs. FAR 31.205-47(f) follows the American Rule by declaring the costs of litigating against the federal government, including a CDA claim, to be unallowable.
REAs are considered to be contract administration, not litigation, thus the costs of REA preparation are allowable. Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995); FAR 31.205-33. As such, the contractor’s Equitable Adjustment (EA) is calculated using the reasonable, actual costs of the contractor’s additional work, offset by any work deleted by the Government. From there, overhead, profit, and interest is tacked on. Most important to this discussion, the contractor may also add the costs of contract administration, which includes the preparation of the REA. In contrast, the costs of prosecuting a CDA claim must be absorbed entirely by the contractor.
Overlapping definitions: transforming a REA into a CDA claim
According to the Federal Circuit, a REA is not a “routine request for payment” and can be written to satisfy the FAR definition of a claim. Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995). Prior case law held that initial submissions of REAs were not claims, but Dalton was the first case to recognize the possibility that a REA could immediately be considered a claim. Furthermore, the DFARS states that a REA may be “convert[ed]” into a claim, which suggests a meaningful distinction between the two. DFARS 243.204-71(c). The salient difference is that CDA claims require four specific certifications but REAs require only two. Thus, a properly-certified REA for an amount exceeding $100,000 can be converted into a proper CDA claim by bridging this certification gap.
The certification requirements for a REA are found in DFARS clause 252.243-7002, Requests for Equitable Adjustment: “I certify that the request is made in good faith, and that the supporting data are accurate and complete to the best of my knowledge and belief.” Good faith and accuracy of data are also the first two certifications required for CDA claims, found in FAR 33.207. To transform the REA into a claim, the remaining certifications are “that the amount requested accurately reflects the contract adjustment for which the contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the contractor.” 10 U.S.C. 7103(b); FAR 33.207.
Controversial tactic: stone-walling a REA until it is converted into a CDA claim
Some Government attorneys advise the Contracting Officer to ignore or deny most REAs to force the contractor to submit a CDA claim to obtain relief. If the REA is converted into a claim, the preparation costs will be unallowable and thus absorbed entirely by the contractor. This ensures the Government will not bear any of the contractor’s costs of preparing the REA. Furthermore, the theory is that contractors will be hesitant to convert some REAs into more adversarial CDA claims, supposedly saving the Government time and money. To say the least, this is not a congenial or collaborative way of conducting commerce with contractors.
Address the REA immediately to avoid future problems
Many other Government attorneys strongly caution against using this tactic because it allows small problems to fester and grow into larger ones. Andrew Fallon, acquisitions attorney for the 21st Space Wing at Peterson AFB, cautions that “Ignoring a problem won’t make it go away. It’s better for the Contracting Officer to engage the contractor, respond to the REA, and negotiate to reach a solution. The intent of the Contract Disputes Act is to encourage settlement, not unnecessary litigation.” When reached for comment on this topic, Professor Nash added, “I tell Contracting Officers and contractors that their job is to put the lawyers out of business by avoiding litigation. Stonewalling REAs creates unnecessary litigation and increases costs in the long run.”
Another reason for Contracting Officers to address REAs promptly is the possibility that the contractor is operating under a false assumption or misunderstanding. After the Contracting Officer and contractor negotiate and carefully review the facts and law, both sides may agree that a REA is inappropriate. Alternatively, the REA may be settled for an amount significantly less than requested. Recklessly stonewalling the REA allows otherwise easily-fixed situations to morph into arduous legal battles that can last for years, draining valuable time and resources from both parties.
If a REA is written such that it is simultaneously a claim, with the four requisite certifications, are the preparation costs allowable? The answer is no. Costs of litigation, including a CDA claim, are unallowable, so a REA that is treated as a claim would fall under FAR 31.205-47(f). Yet if the costs of preparation are unallowable, and if it is treated as a claim, is it really a REA anymore? Or is it some exotic REA/claim hybrid? These may be philosophical questions beyond the ken of Government contracts.
The unsolved mysteries surrounding REAs and claims can be considered mere semantics and wordplay. But in the harsh reality of Government contracting, both Contracting Officers and contractors must understand the distinctions between REAs and claims. Otherwise, lack of expertise will cause contractual difficulties, unnecessary misunderstandings, and costly delays.
The similarities and overlapping definitions of REA and claim are problems of imprecise regulation, murky case law, and poorly-planned legislation, not merely differences of opinion between two well-respected commentators in Government contracting. This academic controversy underscores why Contracting Officers, Contract Managers, contractors, and acquisition team members must be dedicated professionals, studious researchers, and critical thinkers. Synthesizing regulations, statutes, and common law requires painstaking analysis and an eye for detail. Understand the fundamental differences between REAs and claims, consider their respective consequences, and keep abreast of the relevant laws and regulations to avoid confusion and complications in Government contracts.