A dispute between two companies who provide linguists for the military in Iraq and Afghanistan led to a $2.86 million verdict for a subcontractor in Fairfax Circuit Court last month.
The federal government awards contracts worth hundreds of millions of dollars for recruiting, training and supporting the linguists.
Those contracts typically call for the government to reimburse the contractors before it completely validates the expenses because auditors and contract administrators often are years behind in reviewing supporting documents.
Throw in subcontracts, provisions that allow for the recovery of indirect as well as direct costs and a fluid market in which today’s subcontractor is tomorrow’s competitor, and the potential for litigation escalates.
Much of the litigation occurs in the U.S. Court of Claims, but the case involving a contractor, L-3 Communications Services Inc., and a subcontractor, Thomas Computer Solutions LLC (TCS), was tried before Fairfax Circuit Judge Lorraine Nordlund. TCS was paid more than $50 million over about five years for its work on the subcontract with L-3, which held the defense department contract.
According to testimony in the four-day trial, TCS performed well under the subcontract to provide and supervise linguists for the government. Part of its work included operation of a national training center for linguists it and other subcontractors recruited.
L-3 paid the bills TCS submitted through April 2008, including those for direct and indirect costs, under a provision that required L-3 to pay TCS within five days of payment from the government or within 45 days, whichever occurred first.
L-3 acknowledged that TCS was entitled to its indirect costs – typically overhead and general administrative costs – and that those costs were subject to modification under the contract.
TCS contended that its indirect costs increased when revenue from direct services decreased after L-3 took over the responsibility for the training center. The relationship between the two companies became more complicated because L-3 lost the prime contract and TCS emerged as a competitor in the rebidding.
It didn’t help that there were errors in the initial invoices TCS sent to L-3 to justify the higher indirect costs it contended that it was entitled to. TCS argued, however, that those discrepancies were reconciled within five months and that an L-3 official told TCS that L-3 would pay about 70 percent of the invoices and ask the government to pay that amount.
TCS agreed to that proposal, but no payments were ever made, even though, as the subcontractor found out later, the government agreed to offer expedited review of TCS’s documents justifying the increase in reimbursement for indirect costs.
L-3 did not provide the documents and justified its refusal to pay the increased costs on the absence of a final audit by the government contracting agencies.
In its post-trial brief, L-3 focused on the terms of the contract and insisted that TCS was entitled to be paid only if it met deadlines for submitting documents justifying the increased costs. Those costs could be recovered only after the government had completed an audit of the submissions and TCS and the government agreed on the appropriate cost rates.
TCS hadn’t met the deadlines and the government had not completed the audit, L-3 said.
Nordlund found that the government could conduct such an audit only if L-3 provided documents in its control and referred to L-3’s actions as “a total catch-22; it was completely unreasonable.”
As a result, in a ruling from the bench on Dec. 15, she awarded TCS the $2.86 million damages the company sought plus prejudgment interest of about $500,000. She rejected TCS’s claim for fraud in the inducement, punitive damages and attorneys’ fees.
Nordlund found that deadlines “were essentially ignored for purposes particularly of this contract simply by virtue of the nature of the contract that was to be performed.”
With linguists overseas and working under circumstances in which automated accounting was impossible, the government was years behind in its analysis of billings under the contracts so that the deadlines were meaningless, she said. That meant the case turned on her determination of the course of dealing between the companies as described by the witnesses more than on the terms of the contract.
She said she found TCS’s analysis of the situation more credible, especially when it was based on testimony and e-mails from current and former L-3 officials and employees.
She directed TCS’s attorneys, Eric S. Crusius, James S. Phillips and Sarah C. Schauerte of Vienna, to draft a final order, and set a hearing for Jan. 4 if L-3’s attorneys, Edward Jackson, James C. Cox and Sarah Maguire, disagree with the language of the order.