In a September 1, 2020, ruling, the Federal Circuit addressed the reasonableness of subcontractor costs stemming from a government-caused delay under KBR’s LOGCAP contract in Iraq. This decision is important for contractors across all industries given the expected flood of COVID-19-related claims involving government-caused delays and/or idle time. The decision provides new guidance on what contractors must show to demonstrate the reasonableness of subcontractor costs.
The case involved a KBR subcontract to First Kuwaiti Co. of Kuwait (“First Kuwaiti”) to transport trailers into Iraq. The dissent (Judge Newman) explains the operational significance of expeditiously delivering these trailers: soldiers were sleeping in “abandoned schools, . . . tents, vehicles, the ground, or any other place soldiers could put a sleeping bag.” The Army tasked KBR with delivering more than 18,000 trailers to multiple locations in Iraq by Christmas 2003, a deadline which was important for both morale and tactical reasons. KBR, in turn, subcontracted to First Kuwaiti.
Both KBR and First Kuwaiti relied upon the government’s contractual obligation to provide force protection for this important mission, and KBR contends that the government’s breach of this duty prevented First Kuwaiti from timely delivering the trailers (note: the majority chose not to reach the question of whether the duty to provide force protection was breached). KBR brought a $51-million claim for subcontract costs stemming from idle time allegedly caused by the government’s failure to provide force protection—comprising primarily idle time for trucks, trailers, and drivers.
Importantly, the Federal Circuit rejected the Armed Services Board of Contract Appeals’ (“ASBCA”) holding that KBR could only claim the actual costs incurred by First Kuwaiti, instead holding that, because the First Kuwaiti subcontract was fixed-price, KBR was only required to show that its payments to First Kuwaiti were reasonable. KBR calculated the delay and idle time costs stemming from the government’s alleged breach using an estimating methodology, and it was, thus, this methodology with which the Federal Circuit took issue.
Ultimately, the Federal Circuit concluded that KBR had not demonstrated the reasonableness of the subcontract costs because of the following defects in KBR’s estimating model:
- First, First Kuwaiti did not always have the number of trucks available at the border that the model assumes it had, and thus, even if force protection had been provided, it would not have been able to deliver trailers as quickly as the model assumes;
- Second, the model assumes that all delays at the border were the result of inadequate force protection, even though some security threats would have delayed the deliveries even with adequate force protection;
- Third, KBR calculated “idle truck days” without substantiating data or records; the Court found it implausible that First Kuwaiti did not record “how long trucks actually waited” at the border and that KBR “supplied no representative data whatsoever” to support its estimates;
- Fourth, KBR’s support for a $300 composite daily rate for each truck, trailer, and driver was only supported by conclusory testimony, despite the fact that First Kuwaiti most certainly had additional, more precise documentation; and,
- Fifth, the $300 daily composite rate improperly assumed for all claimed delay days that each trailer was attached to a truck and driver, even though some trailers were offloaded and stored.
Due to these defects, the Court ruled that “KBR supplied no meaningful evidence to the Board showing the reasonableness of its costs, nor has it explained the inconsistencies between its proposed cost model and the factual record.”
The dissent criticizes this ruling as essentially requiring KBR to provide “the same degree of detail for which the court has reversed the ASBCA”—i.e., essentially requiring KBR to demonstrate the actual costs incurred by First Kuwaiti, even though the Court held this was not required. The dissent further rebukes the majority for demanding greater precision and documentation, while declining to remand the case for additional evidence under the standard it has imposed, thereby denying KBR the opportunity to correct these defects and continue to pursue its claim.
The case provides a number of important lessons for contractors:
- First, when using an estimating methodology for delay costs, it is critical to refine the model to account for as many known variables as possible.
- Second, provide as much documentation as possible to support the model’s assumptions and address head-on any documentation that contradicts the model.
- Third, when pursuing an appeal, carefully consider the requested remedy. Here, though the Federal Circuit reversed a critical ASBCA finding that was adverse to KBR, KBR was left without an ability to further pursue this claim because the Federal Circuit did not remand the case back to the Board for additional proceedings that could have allowed KBR to rectify the deficiencies in its estimating model.
The case is Kellogg Brown & Root Services, Inc. v. Sec’y of the Army, No. 2019-1683 (Fed. Cir. Sept. 1, 2020).