Builders and Contractors Exchange
Weekly Bulletin: 18 Oct 2004
Contractor Entitlement To Profit On Equitable Adjustments For Stopped Work
By: Trey Kelleter
Contractors know that stop-work orders happen frequently with government contracts. In those situations it is only fair that the contractor receive an equitable adjustment for its added costs and even a reasonable profit on those increased costs. But some contractors find that the government isn't always willing to provide the reasonable profit that goes with the added costs. For example, the government sometimes tries to deny the contractor its reasonable profit on the equitable adjustment by claiming that the original contract was not profitable. Is this a valid basis for denying a contractor its profit on new costs when the government is the party responsible for creating those new costs?
The Armed Services Board of Contract Appeals recently ruled that it is not a valid argument by the government. In the case of Rex Systems Inc., the Board reiterated that the "lack of profitability of the original contract work should have no bearing on a contractor's right to a reasonable profit on its increased costs as part of an equitable adjustment." The Board pointed out that profit is part of an equitable adjustment unless the contract provides otherwise. For example, Suspension of Work clauses often expressly exclude profit from equitable adjustments that arise from such a clause. In Rex Systems Inc., however, the government suspended work under the contract's Stop-Work Order clause, which provided for the payment of an equitable adjustment and did not expressly exclude profit. (Rex Systems had completed 90 percent of its work on a supply contract for circuit card assemblies when a wiring problem - not the contractor's fault - led the government to stop work under the Stop-Work clause so that problems could be ironed out.)
It is not clear on what basis the government argued that the original contract was not profitable or how it proposed that it should have been determined. But, importantly, the Board recognized this to be a red herring. Equitable adjustments should include reasonable profit unless it is expressly excluded. In this case, the Board found a 10 percent profit on the adjusted costs to be reasonable regardless of the profit, or lack of it, on the original contract.
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.