Government Contracts Monitor

Contractors Assume The Risks That They Properly Priced A Firm Fixed Price Contract

April 25, 2014

It is a simple rule of government contracting: the contractor assumes the upside and downside risk involved in its firm fixed price contract pricing, unless very limited exceptions apply. The Federal Circuit recently provided another example to support this general rule in Lakeshore Engineering Services, Inc. v. United States, No. 2013-5094 (Fed. Cir. April 11, 2014).

Lakeshore Engineering Services, Inc. (“Lakeshore”) is a construction company. In 2007, Lakeshore bid on an IDIQ contract for repair, maintenance, and construction services at Fort Rucker, AL. As to the costs for the various services, the solicitation specified that the calculation would use unit prices found in the “Universal Unit Price Book” (UUPB) for items listed in that book and specifically tailored for Fort Rucker. The UUPB prices were not guaranteed as being accurate or reflecting the actual market unit prices for various services. To compensate bidders in order for any awarded contracts to be profitable, the solicitation provided that bidders were to multiply the UUPB prices by “coefficients” of their own creation and the coefficients would be the basis for contract award. Lakeshore was awarded the contract in April 2007 and subsequently began work on seventy-eight separate firm fixed price task orders under the contract.

When the Army exercised its option to continue the contract beyond the base year, it increased payments based on a price adjustment clause in the contract, which provides for adjusting coefficients for the “option years” based on a Building Cost Index for the construction industry. Lakeshore began an additional seventy-four firm fixed price delivery orders under the contract in the first option year.

After two years under the contract, Lakeshore concluded that it had incurred higher costs for its work than were covered by the payments made under the contract, whether because the UUPB prices were inaccurate at the time of contracting or because prices had risen for certain inputs—notably, steel and gasoline—after the contract was made. Lakeshore requested an equitable adjustment of contract prices, but the government denied the request. Lakeshore filed suit against the government in the United States Court of Federal Claims. The COFC granted the government’s motion for summary judgment, dismissing all of Lakeshore’s claims. Lakeshore appealed.

As the appellate court explained:

[T]he language of the contract does not promise that the prices in the UUPB were accurate or place on the government the risk that they will turn out to be inaccurate. To the contrary, the solicitation states that the prices in the UUPB are a “Government Estimate” and that “no allowance will be made after award.” Indeed, the solicitation clearly states that each task order issued for the performance of work is a “Firm Fixed- Price” contract. The essence of a firm fixed price contract is that the contractor, not the government, assumes the risk of unexpected costs.

The Court also noted that the plain language of the solicitation reinforced the allocation of pricing risk to Lakeshore “by affirmatively pointing the potential contractor to the mechanism it should use in its bid to account for potential error in the 2006 UUPB prices. It requires that Lakeshore’s coefficient take into account ‘all costs other than the prepriced unit prices,’ and it provides a nonexclusive list of the factors that the coefficient must include, one of which is ‘[o]ther risks of doing business.’” In short, all of the pricing risk for the firm fixed price task orders fell on Lakeshore.

Lakeshore also argued that even if it had the pricing risk, it should still be entitled to an equitable adjustment based on DFARS § 252.243-7002. As the Court explained, “[i]t is a necessary condition for an adjustment under the FAR provision that the increased contractor cost be the result of a change to the contract made by the government. Lakeshore’s claim is not based on any such government modification; the claim that prices rose during the term of the contract does not entitle Lakeshore to equitable adjustment under the FAR provision. Similarly, the price-adjustment clause of the contract, Army Federal Acquisition Regulation Supplement (AFARS) § 5152.237-9000, entitled Lakeshore to an upward adjustment only under the bargained-for methodology, using the Building Cost Index.”

This case provides simply the latest example as to why contractors should carefully read the pricing, price-adjustment, and equitable adjustment clauses of their contracts. Especially in firm fixed priced contract settings, contractors should plan on pricing their contracts correctly at the outset and have no realistic expectation of obtaining an equitable adjustment, unless all legal requirements are met.

Michael J. Schrier is the attorney responsible for the content of this article.