How can a subcontractor successfully file a CDA Claim? It requires cooperation between all parties.
Subcontractors can bring a "flow-through claim" that operates under the same rules and procedures as a typical prime contractor claim under the Contract Disputes Act of 1978.
The only difference is that the subcontractor's claim must be certified by the prime who actually holds the contract with the government. Generally, the sub is also required to certify the claim.
The prime essentially brings the claim on behalf of its subcontractor. Or another way of looking at this is the prime lets the subcontractor use his name to bring the claim.
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This can be a very complicated situation, and any given case will involve a great deal of nuance. We explain the basics below, but remember that in the real-world things are not so straightforward or simple.
Should the Prime Contract Participate in a CDA Claim on Behalf of a Subcontractor?
The first question that comes up is whether the prime contractor will participate. You determine that as follows:
“In our view, the prime’s routine hesitations about the merits of a subcontractor’s claim should not cause it to refuse sponsorship. Basically, the prime contractor needs to let the subcontractor move forward and get out of the way, while engaged in watchful waiting as to how it proceeds.”
What does the subcontract actually say? Many times it will permit virtually automatic flow-through claims sponsored by the prime to go to the government.
If it does not, then you can negotiate a joint appeal agreement between the prime and the sub, described in more detail below.
We typically advise our prime contractor clients to agree to sponsor their subcontractor claims. There are a number of good business reasons to do this. The prime would rather the government pay for any damages resulting from the subcontractor's claim and it is good to maintain relationships with your good subcontractors.
All of this of course requires the factual predicate – that the government created the problem and caused the extra costs giving rise to the claim. Sometimes that’s not true, and if so, sponsorship doesn’t work and should not be pursued.
After the claim has been certified and submitted to the contracting officer, the prime can, if it chooses, mostly fade away into the background and let the subcontractor handle things. In many cases this is not a good idea – the prime needs to stay actively involved. With no active involvement by the prime, the subcontractor is using the prime’s name with no checks and balances. And in addition, the prime cannot escape from any ongoing claim processing or litigation. It will likely have to produce documents in discovery and produce employees for depositions and testimony, even though they do not need to file pleadings or otherwise participate in trial.
What Actions Should the Prime Contract Take in a CDA Claim on Behalf of a Subcontractor?
The first question that comes up is whether the prime contractor will participate. You determine that as follows:
What does the subcontract actually say? Many times it will permit virtually automatic flow-through claims sponsored by the prime to go to the government.
If it does not, then you can negotiate a joint appeal agreement between the prime and the sub, described in more detail below.
We typically advise our prime contractor clients to agree to sponsor their subcontractor claims. There are a number of good business reasons to do this. The prime would rather the government pay for any damages resulting from the subcontractor's claim and it is good to maintain relationships with your good subcontractors.
All of this of course requires the factual predicate – that the government created the problem and caused the extra costs giving rise to the claim. Sometimes that’s not true, and if so, sponsorship doesn’t work and should not be pursued.
After the claim has been certified and submitted to the contracting officer, the prime can, if it chooses, mostly fade away into the background and let the subcontractor handle things. In many cases this is not a good idea – the prime needs to stay actively involved. With no active involvement by the prime, the subcontractor is using the prime’s name with no checks and balances. And in addition, the prime cannot escape from any ongoing claim processing or litigation. It will likely have to produce documents in discovery and produce employees for depositions and testimony, even though they do not need to file pleadings or otherwise participate in trial.
How Does Case Law Impact Subcontractor Claims?
There is a very important legal gloss on this entire flow-through situation. It is a Federal Circuit Court of Appeals case that deals with a precise issue that must be resolved in flow-through situations. What is the prime contractor really certifying? What is he responsible for in terms of the subcontractor’s claim?
And the answer is not a great deal – if the prime handles it correctly. Prime contractors often state a concern over the validity of the claim as a reason to avoid getting involved with its subcontractor's claims and helping to process those that are really the responsibility of the government.
Prime contractors do not want to get caught up in a false claim situation, or otherwise be involved in the subcontractor's dispute with the government.
However, this issue has been dealt with by the courts, and the prime does not face scrutiny for sponsoring a subcontractor claim if it is done in good faith, carefully, and in accordance with the guidelines set down by the courts.
The decision by the U.S. Court of Appeals for the Federal Circuit in United States v. Turner Construction, 827 F.2d 1554 (Fed. Cir. 1987) in effect absolves the prime from having to get in and examine and make the subcontractor's claims absolutely correct before it certifies them. In Turner, the prime provided an unconditional certification of the flow through claim, which it then in effect qualified by its separate letter to the government that set out problems it had with the subcontractor's claim.
This procedure allows the claim to move forward while addressing the prime's concerns. It is also fair to the government because it causes the prime to raise issues that maybe only it would see in the claim, based upon its close performance proximity to the subcontractor.
In our view, the prime's routine hesitations about the merits of a subcontractor's claim should most often not permit it to refuse sponsorship. Nor is it a good business idea to do so. Basically, the prime contractor needs to let the subcontractor move forward and get out of his way – there is no justification for refusing sponsorship in a typical claim situation.
At the same time, the prime contractor can maintain some control over the situation – by the letters it sends to the government commenting on the subcontractor’s claims. Those comments do not qualify the certification, nor prevent its effectiveness. The Turner case specifically so holds.
Is There a Path for Joint Appeal Agreements?
“These issues can be dealt with to a large degree by creating a joint appeal agreement between the prime and sub that covers these and other detailed issues about processing claims.”
A major underlying concern with flow-through claims is who will end up paying for the subcontractor's increased costs on the job – the government or the prime contractor? And what about a situation where it is later determined that the prime was responsible for the increased costs – not the federal government?
These concerns often create tension between the prime and the sub, and can drive a good deal of hesitation by the prime in cooperating with the claim flow-through procedures and providing the sub with information.
These issues can be dealt with to a large degree by creating a joint appeal agreement between the prime and sub that covers these and other detailed issues about processing claims. We have provided below a link to two sample joint appeal agreements – a short form and long form. Such agreements can foster cooperation, and help the subcontractor obtain information from the prime contractor that it needs to pursue its claim.
We recommend their use, even if the subcontract provides in general ways for flow through claims. The subcontract provision generally needs more detailed explanation, and the parties can negotiate that in their joint appeal agreement for each individual set of claims.
How Would the Subcontractor CDA Claim Proceed in Court?
Once the prime certification has been dealt with, there are no more legal particularities to a flow-through claim. A subcontractor in this scenario is entitled to bring all the usual legal theories – changes to the contract, defective specifications, impact/disruption costs, etc. The subcontractor will also have all the usual discovery tools. And there is no difference in calculating or demonstrating your cost quantum.
These claims can be brought in the same forums as a standard Contract Disputes Act claim – the Armed Services Board of Contract Appeals, the Civilian Board of Contract Appeals, or the U.S. Court of Federal Claims – all in the Washington, DC area. In maritime cases – the Federal District Court can also be utilized.
Government Claims v. Claims Against Prime: The Elephant in the Room.
In some cases, it is difficult to distinguish between claims against the government versus situations where the sub's increased costs were really caused by the prime contractor's fault.
These situations need to be evaluated carefully by both the prime and the sub given their separate interests in the matter before taking any actions. Most of these issues would be specially negotiated in the joint appeal agreement for the particular claims. However, we have actually seen provisions in the subcontract clause permitting the flow-throughs. Therefore:
With special care, read any dispute provisions or liquidating agreements that may be in the subcontract. What does the subcontract really say and require?
Consider a liquidating agreement which is often negotiated between the parties, and which in turn generally commits the subcontractor to take only what it gets from the flow-through appeal to the government, and waive any other actions against the prime.
This liquidating agreement provision will limit the prime's liability to whatever the sub obtains from the government – so if the increased costs were truly caused by the prime, the subcontractor could end up losing a lot of money. The sub therefore needs to make informed decisions about whether the prime or the government is really responsible for the increased costs.
One good safety mechanism for the subcontractor and the prime contractor is to include a kick-out provision in the joint appeal agreement. This lets either party kick the other party out if it determines that the claims really don't flow through to the government, but are really against each other.
It is also crucial to recognize the one-year statute of limitations from the end of work to bring a Miller Act suit against the prime's payment bond.
Moving Forward with the CDA Claim
The foregoing material is a simple overview to a very complex topic. Bringing a subcontractor claim on a prime government contract job requires careful consideration of many competing factors, and you must sometimes proceed with limited information and cooperation from both parties to the subcontract.
But the Turner Construction case shows that the prime should not obstruct a valid subcontractor claim, and in any event, the prime should understand that it will be sued itself if the subcontractor is not able to assert its CDA claim to the government. Recognize that this is what’s ultimately going to happen if the prime obstructs the subcontractor, and the subcontractor has the guts to proceed against the prime in litigation. The prime may very well end up paying the sub – even for claims that are the government’s responsibility!!!
Our overall advice to prime contractors and subcontractors would probably be summarized in almost all situations as follows:
In our view, the prime's routine hesitations about the merits of a subcontractor's claim should not cause it to refuse sponsorship. Basically, the prime contractor needs to let the subcontractor move forward and get out of the way, while engaged in watchful waiting as to how it proceeds.