The government has the right to terminate, in whole or in part, a government contract pursuant to the default clause when the contractor fails to perform its contractual obligations. The government may charge the defaulting contractor any excess costs it incurs in procuring replacement products or services beyond the contract price. Under Federal Acquisition Regulation (FAR) 49.402-6, the contracting officer (CO) must repurchase the same or similar products or services against the defaulted contractor’s account as soon as practicable at as reasonable a price as practicable. If the repurchase is made at a price exceeding the price of the terminated products or services, the CO must issue a written demand to the defaulting contractor for the total amount of the excess. In order to establish an excess costs of reprocurement claim, the government must demonstrate that: (1) the reprocured supplies are the same as or similar to those involved in the termination; (2) it actually incurred the excess costs; and (3) the government acted reasonably to minimize the excess costs resulting from the default termination. If the government is unable to establish these elements, it may still proceed under a breach of contract theory, but it must then carry the heavier evidentiary burden of proving actual damages rather than relying on reprocurement costs. Significantly, the government’s claim for excess costs of reprocurement is considered distinct from the government’s default termination claim, and thus, has its own six-year statute of limitations once the excess reprocurement claim accrues under the Contract Disputes Act (CDA).
In M.E.S., Inc. v. United States, 104 Fed.Cl. 620 (2012), the Court of Federal Claims (COFC) recognized this distinction and found the government’s excess costs of reprocurement claim timely even when the claim was submitted ten years after the underlying default termination. The United States Postal Service (USPS) issued the contract for the construction of a postal facility in Riverhead, New York. The contract was terminated for default in June 1999 and was reprocured. The reprocurement project was completed in June 2005 with the government making a final payment in September 2006. In February 2009, the CO issued a final decision that the USPS was entitled to a little over $800,000 in excess reprocurement costs. In the suit that followed at the COFC, the contractor argued that the government’s claim was untimely because it was filed more than six years after the default termination decision. However, the COFC disagreed, noting that the excess reprocurement claims are unique and separate from their underlying default termination claims, to promote administrative efficiency by avoiding the need for the government to prove excess reprocurement costs using market value estimates. The COFC held that excess reprocurement cost claims accrue when the government makes the final payment to the replacement contractor. Since the government made the final payment to the replacement contractor for the Riverhead project in September 2006, its February 2009 claim was timely under the CDA because it was within six years of accrual. Notably, although found timely, the government’s claim was ultimately unsuccessful here due to a failure to mitigate excess costs owing to the government having waited too long to reprocure.
The Fulford doctrine further exhibits the uniqueness of excess costs of reprocurement claims, as well as their distinction from the underlying default termination decision. Under the Fulford doctrine, when the contractor fails to timely appeal a default termination, it may still challenge the merits of the government’s termination decision when appealing the later assessed excess costs of reprocurement. Thus, contractors may elect not to challenge a default termination decision until and unless excess costs of reprocurement are attached to the default. However, contractors should be mindful that the application of the Fulforddoctrine is limited to situations where the government files an excess costs of reprocurement claim against the contractor following the default. In J-Way S., Inc. v. United States, 516 F. Supp. 3d 84, 92 (D. Mass. 2021), aff'd sub nom. J-Way S., Inc. v. United States Army Corps of Engineers, 34 F.4th 40 (1st Cir. 2022), the U.S. District Court for the District of Massachusetts, while exercising admiralty jurisdiction over a CDA claim involving a government maritime contract involving dredging, held that the Fulford doctrine did not apply to permit a contractor to bring its time-barred challenge to a default termination decision. In that case, the defaulted contractor argued for the application of the Fulford doctrine as the U.S. Army Corps of Engineers (USACE) had hired a replacement contractor following default that was being paid by a surety. The surety in turn was assessing those reprocurement costs against the contractor. However, the District Court declined to extend the Fulford doctrine to this scenario because the USACE had not filed an excess costs of reprocurement claim against the defaulted contractor. The decision was later affirmed by the U.S. Court of Appeals for the First Circuit.
Following a termination for default, the government may file a claim for excess costs of reprocurement to recover costs incurred in excess of the contract price from the defaulted contractor. The government must establish three elements to successfully assess excess costs of reprocurement, including the reasonable mitigation of excess costs. Excess costs of reprocurement claims are considered separate from the government claims for termination for default. As a result, these claims accrue later than the government’s default termination claims when a final payment is made to a replacement contractor. This later accrual date supports administrative efficiencies by avoiding the need for the government to prove its excess reprocurement costs using market value estimates. However, the government is still obligated to complete the reprocurement process at a reasonable price and file its excess costs of reprocurement claim against the defaulted contractor as soon as practicable. If the government waits too long to reprocure, it may fail to satisfy the requirements to establish an excess costs of reprocurement claim and may be forced to proceed under a more evidentiarily burdensome breach of contract theory. The Fulford doctrine may provide an alternative avenue to appeal a default termination for contractors that fail to timely appeal the termination decision, either because they expect no monetary damages to attach or because they miss the appeals deadline. Under the doctrine, defaulted contractors may also challenge the appropriateness of the default termination decision when appealing the government’s excess costs of reprocurement claim. While the Fulford doctrine may prove helpful, contractors should nevertheless be mindful of its limited applicability when electing to forego a timely appeal to a default termination.
This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
