Legal Fees: are you negotiating or litigating?

As much as we hate to admit it, our clients don't smile with glee when they pay our fees. More often than not, clients view legal fees as a necessary expense that never comes back. This especially is the case when fees are being paid to, shall we say, address differences of opinion with the Government.

During the course of performing a contract, things happen. Circumstances beyond the contractor's control might cause a delay. Perhaps the Government might require a change to the product or service that it is acquiring. Or, the Government could terminate the contract for convenience. In any of these circumstances, a contractor may seek an equitable adjustment, a price adjustment, or negotiate a termination settlement proposal.

Sometimes the process of seeking an adjustment is borderline amiable. Your Contracting Officer might recognize that, yes, a change occurred and, yes, we'll pay you for it. Other times, the walls go up because there's a disagreement. In both circumstances, good lawyering can increase the odds that the contractor will be made whole for the increased costs of performance or the expense of winding down a terminated project.

Even in situations when the walls have gone up, a contractor is entitled to recover the costs of legal services occasioned by a change or convenience termination. Notably, FAR 31.205-33 permits the recovery of professional and consultant services when the cost of the services is “reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government.”

Whether such costs are allowable depends, among other things, on whether the costs are incurred for the purpose of contract administration or for the purpose of prosecuting or defending a claim. When a contractor engages counsel “for the genuine purpose of materially furthering [a] negotiation process, such cost should normally be a contract administration cost allowable under FAR 31.205-33.” See Bill Strong Enterprises, Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995). Fees "incurred in preparation of a [Request for Equitable Adjustment] are themselves presumptively compensable as an equitable adjustment” where the costs were incurred in furtherance of negotiation with the Government. SUFI Network Services, Inc. v. United States, 105 Fed.Cl. 184 (2012).

This presumption is strongest for legal fees incurred prior to the submission of a certified claim because the legal advice ostensibly is being provided to further the negotiation process. However, the submission of a claim does not necessarily mean that legal fees will be unallowable. For example, if the contractor and the Government set aside litigation activities to pursue negotiation, one could plausibly include the fees incurred in those negotiations as part of the agreed-upon settlement of the claim. 

How can you tell the difference? Of course, the facts of a given situation will lead to different results and the Court of Federal Claims (post-claim fees unallowable) has taken a different approach from the ASBCA (post-claim fees can be allowable). However, all bets might be off if you're not making a record that reasonably distinguishes between the costs of negotiating versus the expense of litigating. Good documentation and cost tracking are crucial. More on that later.

Our (somewhat self-interested) bottom line advice: legal counsel can increase the chances you'll be made whole when changes occur. And, you just might get the Government to pay for that advice.