M.E.S., Inc. v. McHugh

NOTE: This disposition is nonprecedential.
United States Court of Appeals
for the Federal Circuit
______________________
M.E.S., INC.,
Appellant,
v.
JOHN MCHUGH, SECRETARY OF THE ARMY,
Appellee.
______________________
2012-1457, -1466
______________________
Appeal from the Armed Services Board of Contract
Appeals in Nos. 56349, 57074, Administrative Judge
Monroe E. Freeman, Jr.
______________________
Decided: January 15, 2013
______________________
MICHAEL H. PAYNE, Cohen Seglias Pallas Greenhall &
Furman, of Philadelphia, Pennsylvania, for appellant. Of
counsel was JOSEPH A. HACKENBRACHT, JR.
DANIEL B. VOLK, Trial Attorney, Commercial Litiga-
tion Branch, Civil Division, United States Department of
Justice, of Washington, DC, for appellee. With him on the
brief were STUART F. DELERY, Acting Assistant Attorney
2 M.E.S., INC. v. ARMY
General, JEANNE E. DAVIDSON, Director, BRYANT G. SNEE,
Deputy Director.
______________________
Before DYK, MOORE, and WALLACH, Circuit Judges.
PER CURIAM.
M.E.S., Inc. appeals a decision by the Armed Services
Board of Contract Appeals (“Board”) denying M.E.S.’s
claims for equitable adjustments under a construction
contract. The Board found that M.E.S. had failed to
present sufficient evidence to support the two claims at
issue in this appeal. We affirm.
BACKGROUND
On September 29, 2001, the U.S. Army Corps of En-
gineers (“Corps”) awarded M.E.S. a $10.3 million firm-
fixed-price contract to design and build a fitness center at
McGuire Air Force Base in New Jersey. The scheduled
duration of the contract was 720 days, with a planned
completion date of November 4, 2003. The project was
repeatedly delayed, for reasons ranging from unusually
severe weather to the discovery of unexpected quantities
of asbestos in the existing structure. The Corps agreed to
postpone the contract completion date twelve times,
extending its duration by 345 days and awarding M.E.S.
$626,469 in additional compensation. Three of the modifi-
cations were issued unilaterally by the Corps, and most of
the remaining, bilateral modifications included a clause
reserving M.E.S.’s right “to request additional compensa-
tion for the delay and impact costs, as well as any ad-
justment to the Overhead charged.” J.A. 3. Though M.E.S.
disputes it, at least one modification appears to have
included an allowance for additional home office overhead
accrued by M.E.S. as a result of the delay. The work was
substantially completed on October 14, 2004.
M.E.S., INC. v. ARMY 3
M.E.S. submitted five claims for equitable adjust-
ments to the Corps’ contracting officer, totaling
$1,250,597.33 (later amended to $1,593,949). The con-
tracting officer denied each of the claims, and M.E.S.
appealed to the Board. The Board sustained two of the
appeals, awarding M.E.S. $105,286.03 (consisting of
$97,908.70 for 155 days of additional field office overhead
and $7377.33 for rental and installation of temporary
bleachers, including profit and fourteen percent over-
head), and denied three others. M.E.S. has appealed two
of those denials.
In the first of the appealed claims (the “cost overrun
claim”), M.E.S. sought $575,113 in cost overruns related
to thirteen work activities, plus profit and overhead.
M.E.S. sought compensation on two theories: first, that
government-caused delays had created inefficiencies and
increased M.E.S.’s material and labor costs, and second,
that the government had constructively accelerated the
project by denying M.E.S. additional time extensions.
M.E.S. sought to recover the entire difference between the
actual cost of each activity, including seven percent profit
and fourteen percent overhead, and the projected value of
the activity as included in its contract bid. The Board
rejected this claim, finding that M.E.S. “ha[d] failed to
prove that the claimed increased [cost] over and above the
‘as-bid’ amounts . . . was caused by government-directed
acceleration or . . . government delays.” J.A. 11; see also
J.A. 14 (noting that M.E.S. had “failed to establish a
causative connection between the delays and the alleged
increased costs claimed”).
In the second claim (the “overhead claim”), M.E.S.
sought $459,845 in “additional Home Office Overhead
Costs” for the added duration of the contract. J.A. 12
(quotation marks omitted). M.E.S. arrived at this figure
by multiplying 210 days of allegedly government-caused
4 M.E.S., INC. v. ARMY
delay 1 by a daily allocable home office overhead rate of
$2189.74. 2 The Board rejected this claim, too, finding
that:
None of these alleged dollar amounts [relied on by
M.E.S. to calculate its daily rate] are supported in
the evidentiary record by a [government] audit
report, or in the absence of such report, by testi-
mony or affidavit of the accountant preparing the
claim or copies of the pertinent financial state-
ments . . . prepared contemporaneously in the
regular course of business, or other persuasive
substantiating accounting documents. Moreover,
nowhere in the [M.E.S.] calculation is there any
allowance for home office expense paid in the
price adjustments previously granted in the modi-
fications for compensable government delays.
J.A. 13. The Board also found “no persuasive evidence
that [M.E.S.] was required to remain on standby and/or
was unable to shift its resources to other un-impacted
work.” J.A. 12.
1 The 210 “delay days” did not include the addi-
tional extensions to which M.E.S. alleged that it was
entitled in its cost overrun claim, but which it never
received.
2 M.E.S. calculated this daily rate by dividing
its 2004 revenue from the contract ($3,971,284) by its
total revenue for the year ($4,359,551); multiplying this
fraction by its total home office overhead for the year
($692,303); and dividing the result by the number of days
it worked on the contract during 2004 (288). In its origi-
nal claim, M.E.S. provided a separate daily rate for each
of the four years during which it worked on the contract;
before the Board, however, it sought to be compensated
for the entire delay at the substantially higher 2004 rate.
M.E.S., INC. v. ARMY 5
M.E.S. timely appealed the Board’s disposition of
these two claims, and we have jurisdiction under 28
U.S.C. § 1295(a)(10).
DISCUSSION
This court may set aside the Board’s determination on
a question of fact only if it is “fraudulent, arbitrary, or
capricious; . . . so grossly erroneous as to necessarily
imply bad faith; or . . . not supported by substantial
evidence.” 41 U.S.C. § 7107(b)(2). A determination is
adequately supported if it is based on “such relevant
evidence as a reasonable mind might accept as adequate
to support a conclusion.” E.L. Hamm & Assocs. v. Eng-
land, 379 F.3d 1334, 1338 (Fed. Cir. 2004).
I. The Cost Overrun Claim
A. The delay theory
A contractor who seeks compensation for costs alleg-
edly caused by government-imposed delays “has the
burden of proving the fundamental facts of liability and
damages.” Wilner v. United States, 24 F.3d 1397, 1401
(Fed. Cir. 1994). Here, the Board found “no persuasive
and particularized evidence . . . establishing the nature
and extent of specific interferences or inefficiencies and
how they materially increased [M.E.S.’s] cost,” and con-
cluded that “[M.E.S.] ha[d] failed to prove that the [cost
overruns] w[ere] caused by . . . compensable government
delays.” J.A. 8, 11.
On appeal, M.E.S. points to testimony by its president
and owner, George Makhoul, recounting the delays it
experienced and tying them to a few specific cost escala-
tors such as material and labor cost inflation and difficul-
ty working in cold weather. M.E.S. has not attempted to
quantify the specific additional costs directly attributable
6 M.E.S., INC. v. ARMY
to any particular item, and instead has asserted that all
its overruns on the thirteen activities, measured relative
to the cost estimates developed for its bid, were caused by
the delays. Substantial evidence therefore supports the
Board’s conclusion.
B. The acceleration theory
Constructive acceleration occurs “when the govern-
ment requires the contractor to adhere to the original
performance deadline set forth in the contract even
though . . . excusable delay[s] . . . entitle the contractor to
a longer performance period.” Fraser Constr. Co. v. United
States, 384 F.3d 1354, 1361 (Fed. Cir. 2004). To prove
such a claim, the contractor must prove “that the govern-
ment insisted on completion of the contract within a
period shorter than the period to which the contractor
would be entitled.” Id. Here, the Board found that M.E.S.
“has not proven that it was entitled to any extension of
the contract performance time beyond [October 14, 2004].”
J.A. 10.
The contractor’s theory was that it was entitled to ad-
ditional delay days and that the government compelled it
to complete by October 14, 2004, thus leading to an accel-
eration claim. The evidence cited by M.E.S. on appeal to
demonstrate that it was legally entitled to a later comple-
tion date, beyond October 14, 2004, consists of two letters,
from August and September 2004, in which the contractor
stated, in a conclusory manner, that the completion date
was January 2005 or later. See J.A. 207, 1115. The Board
found the contractor’s evidence insufficient to “prove[]
that it was entitled to any extension of the contract per-
formance time beyond [October 14, 2004].” J.A. 10. Sub-
stantial evidence supports the Board’s finding that M.E.S.
“has failed to prove that the [cost overruns] w[ere] caused
by government-directed acceleration.” J.A. 11.
M.E.S., INC. v. ARMY 7
II. The Overhead Claim
M.E.S. claims that the Board erred in denying its
claim for additional home office overhead. As a general
rule, home office overhead damages are calculated in
government contract cases by applying a fixed percentage
to the additional direct costs included in the contract
modification or in the claim for equitable adjustment. See
C.B.C. Enters., Inc. v. United States, 978 F.2d 669, 674-75
(Fed. Cir. 1992). Indeed, the Corps included an allowance
for home office overhead in at least one of the modifica-
tions it issued to M.E.S., and M.E.S. was awarded a fixed
percentage for overhead in one of the two claims allowed
by the Board. M.E.S.’s second claim on appeal does not
rely on this theory, however. 3 Rather, the overhead claim
relies on the so-called Eichleay formula, derived from the
Board’s decision in Eichleay Corp., ASBCA No. 5183, 60-2
BCA ¶ 2688, aff’d on reconsid., 61-1 BCA ¶ 2894. 4
In certain limited circumstances, this court has ap-
proved the use of the Eichleay formula, which relies on a
daily allocable overhead rate, as an alternative to the
fixed-percentage method. In order to recover Eichleay
3 M.E.S. did include a fixed percentage of over-
head in the damages it sought in its first claim on appeal,
the cost-overrun claim.
4 In its reply brief, M.E.S. asserts for the first
time that the damages it seeks are not Eichleay damages,
but rather “insufficient compensation for its general and
administrative expenses associated with contract modifi-
cations.” Reply Br. 26. The formula it used to calculate its
alleged damages is clearly based on Eichleay, however,
and it previously claimed to be “using the Eikley [sic]
formula,” see J.A. 70. In its briefs, M.E.S. refers inter-
changeably to “overhead” and “G&A,” or “general and
administrative,” expenses.
8 M.E.S., INC. v. ARMY
damages, however, a contractor must demonstrate, among
other elements, that “performance of the contract [was]
suspended or significantly interrupted” by the govern-
ment, and not merely that the period of contract perfor-
mance was extended and an additional stream of direct
costs created. See Interstate Gen. Gov’t Contractors, Inc. v.
West, 12 F.3d 1053, 1056-58 (Fed. Cir. 1993); see also
Cmty. Heating & Plumbing Co. v. Kelso, 987 F.2d 1575,
1581-82 (Fed. Cir. 1993), modified on reh’g, 1993 U.S.
App. LEXIS 31453 (Fed. Cir. May 21, 1993); C.B.C. En-
ters., 978 F.2d at 674-75. The requirement that the work
on the contract must have been suspended or interrupted
is one facet of the more general requirement that the
government must have placed the contractor on
“standby.” See Interstate, 12 F.3d at 1056-57 & n.5; see
also P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1371-73
(Fed. Cir. 2003) (outlining the elements of the standby
requirement). Here, the Board found “no persuasive
evidence that [M.E.S.] was required to remain on
standby” during any of the additional time periods, J.A.
12, and we find no reason to disturb this finding. 5
Even if M.E.S. in this claim had proceeded on the the-
ory that it is entitled to home office overhead as a fixed
percentage of the additional direct costs caused by the
5 On appeal, M.E.S. points to evidence showing
that it had no other contracts during most of the time that
it was engaged by the Corps. The “standby” element
requires a contractor to show more than just that delays
rendered it idle; it must also show that the government
required it to remain idle, or that circumstances otherwise
rendered mitigation “impractical.” See Daly Constr., Inc.
v. Garrett, 5 F.3d 520, 522 (Fed. Cir. 1993); see also Cmty.
Heating, 987 F.2d at 1582 (requiring the contractor to
“demonstrate[] that it could not have taken on any other
jobs during the contract period”).
M.E.S., INC. v. ARMY 9
contract modifications, M.E.S. could not prevail. M.E.S.
has failed to present, at any stage of the litigation, a
sufficient calculation of such damages. The Board found
M.E.S.’s home office overhead calculation to be deficient
both for its lack of substantiation and for its failure to
account for those home office overhead amounts already
included by the Corps in its price adjustments. Substan-
tial evidence supports the Board’s determination that “the
alleged increased home office expense incurred for com-
pensable government delays is not proven in any
amount.” J.A. 13.
Thus, substantial evidence supports the Board’s find-
ings that M.E.S. failed to prove that its overruns were
caused by government delays; that any “acceleration” of
the contract took place; or that M.E.S. is entitled to
additional compensation for home office overhead.
AFFIRMED