Liquidating Trustee Ester Du Val of Ki Liquidation, Inc. v. United States

In the United States Court of Federal Claims

No. 06-465C

(Originally Filed: May 31, 2014)

(Reissued: June 11, 2014)1

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LIQUIDATING TRUSTEE ESTER DU

VAL OF KI LIQUIDATION, INC.,

Plaintiff, Contract; Department of

State; default termination;

v. fraud counterclaim;

differing site condition.

THE UNITED STATES,

Defendant.

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Louis James D’Agostino, McLean, VA, David G. Barger, McLean, VA,

Michael Snyder, McLean, VA, and Józef S. Przygrodzki, McLean, VA, of

counsel for plaintiff.

Devin Andrew Wolak and Daniel B. Volk, Civil Division, Department

of Justice, Washington, DC, with whom are Stuart F. Delery, Principal Deputy

Assistant Attorney General, Bryant G. Snee, Acting Director, and Donald E.

Kinner, Assistant Director, for defendant. John C. Sawyer, Department of

State, Washington, DC, and Thomas D. Dinackus, Department of State,

Washington, DC, of counsel.

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OPINION

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1

This opinion was originally filed under seal. Publication was deferred

pending parties’ review for redaction of protected material. The court adopted

the parties’ suggested redaction, which is indicated by brackets, and made

other minor editorial changes. The opinion is now prepared for release.

BRUGGINK, Judge.

Before the court is a dispute involving a contract between the United

States, acting through the Department of State (“DOS”), and Kullman

Industries, Inc. (“KI”), a company now no longer in business, which at the

time specialized in large-scale modular construction. The contract obligated

KI to build the United States Embassy compound in Dushanbe, Tajikistan.

Kullman Industries worked on the project for nearly three years and nearly

brought it to completion before the contract was terminated by DOS for

default. KI went into bankruptcy, and the trustee in bankruptcy succeeded to

its interests, although we will refer to KI rather than the trustee throughout.

KI advances three claims here: first, it challenges the agency’s

termination for default and seeks conversion to a termination for convenience;

second, it advances a claim of approximately $4.3 million for geotechnical

work, which it contends was outside the terms of the contract; and it asserts a

claim of approximately $1 million with respect to additional security

remediation and related mold and mildew mitigation. The government has

counterclaimed, asserting fraud and seeking both monetary penalties and

forfeiture of KI’s claims. The court has jurisdiction to resolve plaintiff’s

claims under the Contract Disputes Act of 1978, 41 U.S.C. §§ 7101-7109

(2012), and pursuant to 28 U.S.C. §§ 1503, 2508 (2012), to adjudicate

defendant’s counterclaims.

The various affirmative and defensive claims were tried between April

and June, 2013. The trial dealt with four issues: 1) whether a portion of the

geotechnical work was outside the scope of the contract; 2) whether the

termination for default was justified; 3) whether certain pay certifications were

false; and 4) which party bore the responsibility for delays and additional costs

associated with construction of a secure part of the embassy. Post-trial briefs

were filed by both parties, and oral argument was heard on January 15, 2014,

after which supplemental briefs were filed. The matter is ready for final

disposition. For the following reasons, we find that the geotechnical work was

within the scope of the contract, the termination for default was justified,

plaintiff did not violate the Forfeiture of Fraudulent Claims Act, although it

did violate the False Claims Act, and the government bears responsibility for

the delays and additional costs associated with the secure space. We reserve

for later resolution the question of damages.

2

BACKGROUND

I. Kullman Industries

Kullman Industries was a family enterprise. The most recent President

and CEO of KI was Robert Kullman, who featured prominently as a witness

at trial and whose testimony we find to be credible. Mr. Kullman’s

grandfather founded Kullman Dining Car Company, Inc. in the 1920’s.

Kullman Dining Car Company successfully built and sold modular diners in

a way that was faster and more easily financed than traditional construction.

The company would fully construct the modular diner in its factory and then

install it on the buyer’s property.

Over the years, that company expanded from production of small diners

to 6,000-plus square foot restaurants. As a teenager, Robert Kullman got his

start in the family business by sweeping floors, painting, and working

carpentry jobs. After high school, Robert Kullman attended Bucknell

University. During the summers, he continued to work at Kullman Dining Car

Company. The day after he graduated from college, Robert Kullman joined

the family enterprise as Vice President.

In the 1970’s, when the market for diners began to wane, Robert

Kullman and his father jointly created Kullman Industries in an effort to

broaden production and grow the business. KI began using its modular

method to construct bank branches, medical buildings, and schools. The

buildings became larger and more complicated. When cellular telephones

were in their infancy, KI got into market for building modular structures for

the telecommunications industry.

In the 1990’s, KI began working on projects for DOS. KI built the

United States Embassies in Bishkek, Kyrgyzstan; Ashgabat, Turkmenistan;

and Bissau, Guinea-Bissau. Just before KI contracted to build the embassy in

Dushanbe, it was doing about $55 million dollars of business each year. Mr.

Kullman was the President and CEO of KI from the 1980’s until it was

dissolved in bankruptcy.

II. The Dushanbe Project: Phase I

In light of its satisfactory performance of its previous contracts, the

State Department began discussing with KI in April of 2002 the project to

3

build a new embassy in Dushanbe, Tajikistan. According to the testimony of

KI’s Chief Operating Officer, John Joseph Lefkus, III, DOS was interested in

pursuing modular construction for the Dushanbe Embassy because of the short

period of time required for construction and installation when compared with

traditional construction and the added benefits to security when construction

is controlled within a factory.

A. Phase I - Design

Because of KI’s unique qualifications, on July 2, 2002, the Director and

Chief Operating Officer of DOS’s Overseas Building Operations (“OBO”),

General Charles E. Williams, agreed to use of a sole source contract with KI

for the Dushanbe project. The stated justification for using other than full and

open competition was that “Kullman Industries, Inc. offers a more direct way

to contract, provides a superior product that meets DS[2] requirements, and, in

addition, has greater experience in servicing the requirements of the

Department.” JX 128 at 3. OBO anticipated a construction budget of

$63,920,000.

The DOS Contracting Officer (“CO”) assigned to the Dushanbe project

at that time was Ralph R. Sutherland. The Contracting Officer’s

Representative (“COR”) was Robert H. Sanders. John Lefkus, KI’s Chief

Operating Officer, represented KI in negotiations.

On July 12, 2002, DOS’s Office of Acquisitions issued solicitation

SALMEC-02-C-0025 for “Phase I”3 to develop a plan for the adaptation of the

standard embassy design to accommodate modular construction and to

facilitate a cost estimate for the Dushanbe embassy. The embassy compound

was to include a New Office Building (“NOB”), also known as the chancery,

the Marine Security Guard Quarters, Warehouse, Compound Access Control

(“CAC” or “gate house”) Building, Material Transfer Station, utility building,

power plant, well water treatment system, septic system, and a perimeter wall

for the compound. The contractor would have 85 days to complete the Phase

I design. The solicitation included over one hundred pages of contract details

2

Neither party has clarified what “DS” means. In the absence of a clear

definition of this acronym, we presume it to refer to “Diplomatic Security.”

3

The project was divided into two phases. The first was the design phase and

the second phase consisted of construction.

4

covering everything from pricing to the Statement of Work (“SOW”) and

referenced additional attachments such as the Standard Embassy Design Intent

Application Manual (“SED manual”), the Site Utilization Plan, and a

Preliminary Geotechnical Report. The SED manual included “the fixed design

elements—the ‘absolutes’ that every project using the Standard Embassy

Design (SED) must follow.” JX 16 at 1, 4. Pursuant to the SED manual, some

elements of the standard design were fixed while other elements could be

adapted to fit the needs of each project.

The SED also provided specifications for a Controlled Access Area

(“CAA”). The CAA was designed as a room within the embassy that contains

special protections for information and occupants.

KI submitted its best and final offer for Phase I of the Dushanbe

contract on August 20, 2002. DOS accepted KI’s offer and issued the notice

to proceed on August 22, 2002. JX 1 at 2. The contract for Phase I was not

executed by Mr. Sutherland and Mr. Lefkus, however, until September 18,

2002. On that same day, Mr. Sutherland and Mr. Lefkus also executed

Modification 001 (“M001”). M001 incorporated several attachments to

Division 1 of the contract and rescinded “Section J,” which included the

Dushanbe Geological Overview, and replaced it with “Section J, Revision 1.”4

While KI worked on Phase I, DOS commissioned the Committee of

Architecture and Building within the Province of the Government of the

Republic of Tajikistan (“SANIIOSP”) to survey, test, and develop a report on

the geotechnical conditions at potential sites for the project. SANIIOSP

produced a report (“geotechnical report” or “SANIIOSP report”), initially in

Russian and then translated into English, on the geotechnical conditions at the

site that was eventually chosen for the Dushanbe project. The geotechnical

report, while perhaps difficult to read, alerted the reader to what the drafters

thought were unusual soil conditions. It reflected that the “main deformation

characteristics of the dusty clay soils, which consist of the sand clay and loamy

soils are the properties of the settlement while putting into the water and the

4

In addition, M001 provided that “[t]he contractor’s proposal for Phase II of

the contract shall include costs to perform requirements described in the

documents” newly incorporated by M001. JX 2 at 1. The contract for Phase

I had a firm fixed-price of $1,025,000.00. Phase II construction of the

Embassy was not guaranteed after the completion of Phase I.

5

first settlement pressure.” JX 10 at 9. Additionally, “[t]he summary quantity

of the possible settlement of the soils because of their own weight can reach

54.84cm with the power of the depth of settlement 16.7m.” JX 10 at 16.

Furthermore, the report provided the following:

The experience of the exploitation of the buildings in the

analogous soil conditions on the territory of Dushanbe shows

that the increase of the moisture content of the soils inevitably

takes place while the engineering development of the territory

because of the break down of the natural regime of the expense

of the different factors (natural and anthropogene). These

changes make [worse] the deformation and strength properties

of the clay soils, the properties of the settlement take place, the

lack of the engineering preparation of the territory can lead to

the deformation of the buildings. . . . [I]t is recommended to do

the projection taking into consideration the full water satiation

of the clay soils.

JX 10 at 15-16. The geotechnical report therefore recommended wetting “the

soil thickness up to the depth of 17m . . . .” JX 10 at 18-19.

KI teamed with the Louis Berger Group (“LBG”), which specializes in

geotechnical engineering, to address the issues involved in developing a

foundation appropriate to the natural conditions of the site. According to an

August 30, 2002 memo, LBG “received a copy of the Geotechnical Report

from OBO on August 16, 2002.” JX 135 at 1.5 On August 30, 2002, Vassilios

Magginas, an architect with DOS, wrote in an e-mail that he had reviewed the

SANIIOSP report and that it was “good, confirms our previous findings, and

contains the basic information to be used for the project.” JX 134 at 1.

B. Site Visit

Phase I included a visit to potential construction sites in Dushanbe,

Tajikistan. KI’s representatives, including Mike Kosinski and Bob Airrika,

traveled to Dushanbe on September 10, 2002, to conduct a site visit and to

5

Although there was a dispute at trial as to when KI or its representatives first

saw the SANIIOSP Report, we find that it was available to plaintiff before it

provided its late-September cost estimate.

6

explore local resources. According to the Contractor’s Trip Report (“Trip

Report”) authored by KI, the site visit lasted until September 14, 2002. JX 137

at 10. The KI representatives were joined by Michael “Mike” Ross, the

Contracting Officer’s Representative and Pete Stella from the government.6

During a meeting that occurred on September 10, 2002, KI attendees were

given a CD-ROM disc containing the “Section-J attachments from the RFQ.”

JX 137 at 22. Pete Stella, Reese Richardson, John Smith, Mike Kosinski and

Bob Airikka met with the Director of SANIIOSP, Saidor Rakhmatullo, who

“indicated that much of the information available for the site was already

included in the geotech report they had prepared.” JX 137 at 9. Mr.

Rakhmatullo offered to provide additional services such as soil testing,

surveying, and designing, but told the meeting participants that SANIIOSP did

not have the necessary equipment to meet the standards set by the American

Society for Testing and Materials (“ASTM”). According to the meeting

minutes, OBO was satisfied with the content of the SANIIOSP report. In the

Trip Report, KI expressed general satisfaction with the information gathered

during the site visit and acknowledged that “OBO provided a geotechnical

report for the property prior to the site visit.” JX 137 at 3-4.

C. Negotiations

Negotiations for Phase II, the separate contract to build the embassy,

began in earnest promptly after the site visit ended. The key issue was price.

On September 20, 2002, Ralph Sutherland wrote the following to his superiors

within OBO, Leroy Wallin, the Director of the Facilities Design and

Construction Division, and Patricia Regalo-Warren, the Branch Chief:

The contractor cannot currently provide an accurate cost

proposal for construction and is reluctant to enter into a GMP

contract at this point. . . . Assuming that the cost [that KI

proposes] is not too outrageous, we will work with the

contractor to establish mutually acceptable terms in determining

the mechanics of converting the construction portion of the

contract into a negotiated fixed price at the (approximate) 30%

design stage. The contract can be structured in a manner that

will obligate the money (using options for other means) for the

6

Although Mr. Sutherland is listed as a team member in the trip report, he

testified that he was not in Dushanbe for the site visit.

7

construction phase of the project at the time of contract award.

JX 138 at 1.

As of September 24, 2002, the government estimated that the Dushanbe

Embassy complex could be built for approximately $58,365,000. According

to this estimate, the “substructure” or foundations for the NOB should cost

about $1,200,000. “SITEWORK - (EXCLUDING PERIMETER WALLS)”

showed a line item value of $2,750,000. JX 139 at 7. Site work included site

preparation, improvements, civil and mechanical utilities, and electrical

utilities. $12,700,000 was allocated for estimated transportation costs

associated with moving materials and personnel to the site.

On September 25, 2002, KI submitted its “Order of Magnitude Pricing”

to the government. Plaintiff offered Contracting Officer Ralph Sutherland a

total cost estimate of $85,761,803. “Local geotech” was a $25,000 line item

included in that number. Transportation of materials to the site, security

design, landscaping, and furniture, however, were listed as allowances in

specific amounts, presumably meaning that costs in excess of those allowances

would be borne by DOS.

Ralph Sutherland wrote to Bob Sanders on September 25, 2002, that

KI’s initial proposed price of $85,181,803 was $26,816,803 above the

government’s estimate. Mr. Sutherland asked that Mr. Sanders “advise OBO

senior management accordingly and show me the money if OBO wishes to

continue pursuing the Kullman design-build SED/modular approach for the

Dushanbe NOB project.” JX 140 at 1 (emphasis in original). Mr. Sutherland

emphasized, “I need to know how much money we have before I can

establish negotiation objectives and limitations and I need time to put a

pre-negotiation plan together. I do not have any funded requisitions for this

project at the present time.” JX 140 at 1 (emphasis in original). Mr.

Sutherland added, “John Lefkus has informed me that the prices are high

because of limited time and information to put together a proposal for a project

of this magnitude. He will be able to negotiate a realistic firm fixed price with

us at the end of the Phase I design development (November 2002).” JX 140

at 1.

Negotiations continued during the period September 27-30, 2002. On

September 30, 2002, Mr. Sutherland wrote to John Lefkus that KI’s September

25 proposal was unacceptable. Mr. Sutherland explained that the estimate

8

was too high and asked KI to “consider a GMP [guaranteed maximum price]

offer of $60,730,000 in a fixed price contract, without incentives.” JX 143 at

1 (emphasis in original). Mr. Sutherland concluded the e-mail by writing, “If

we do not reach agreement this morning, the project may not be awarded to

Kullman because of what we can afford.” JX 143 at 1. Presumably this was

because September 30 was the last day of the government’s fiscal year. Mr.

Sutherland also proposed certain deletions from the SOW.

Later that day, Mr. Lefkus responded to Mr. Sutherland’s

communication. Mr. Lefkus summed up the changes in the scope of work,

which included reducing the number of gate houses, reducing by 200 lineal

meters the perimeter wall, and reducing the size and function of the utility

building. Mr. Lefkus then lowered the proposed allowance for transportation

to $10 million based on the following: “[f]actors which reduce project scope;”

“[p]otential of local sourcing;” and “[r]equirement to ship only 50% of volume

U.S. flag.” JX 145 at 1. Based on these changes, KI agreed to “entertain a

GMP of $60,730,000.00 noting the $10 million transportation allowance.” JX

145 at 1.

On September 30, 2002, DOS issued Modification number two

(“M002”) to the contract and obligated available funds. The amendment was

issued “for a guaranteed maximum price of $50.730 Mil plus an allowance of

$10.0 Mil for transportation.” JX 149 at 5.

Shortly after Mr. Sutherland closed this deal, Mr. Sanders referred to

Mr. Sutherland as a “miracle worker.” JX 148 at 1. Mr. Sanders was replaced

as COR by Michael (“Mike”) Ross on October 2, 2002.7

7

There was a lot of turnover in the OBO employees who managed the

Dushanbe Project. The parties stipulated to the following chronology of the

Contracting Officers: from July 2002 until December 11, 2003, Ralph

Sutherland was the CO; from December 11, 2003, until June 16, 2004, Lorri

Lowther was the CO; from June 17, 2004, until July 15, 2004, Lisa Goodwine

was the CO; from July 15, 2004, until October 26, 2004, Brian Mulcahy was

the CO; and then from October 26, 2004, until the contract was terminated on

June 17, 2005, Lorri Lowther served a second stint as CO. The CO was

assisted by a COR who also carried the title of Project Executive. The first

COR was Robert Sanders from July 2002 to October 2, 2002, then Michael

(continued...)

9

D. Terms of the Contract

Through M002, the terms of and attachments to the solicitation were

made part of the contract pursuant to which KI agreed to build the embassy.

In addition, it provided the following with respect to pricing:

Kullman Industries [sic] proposal of $60,730,000 dated

September 30, 2002[,] is hereby accepted by the Government.

The Contractor shall perform Phase II design, construction and

fabrication of the new U.S. Embassy compound in Dushanbe,

Tajikistan in accordance with contract number SALMEC-02-C-

0025, as modified heretofore. This work is to be performed for

a Guaranteed Maximum Price (GMP) of $50,730,000, plus an

allowance of $10,000,000 for Transportation. The GMP will be

evaluated and a fixed price for phase II will be negotiated upon

completion of Phase I of this contract. A written Notice to

Proceed must be issued prior to performance of Phase II

services.

JX 3 at 1. The following provisions regarding price were also included in or

attached to the solicitation and were thereby incorporated by reference into

M002:

B.1 PRICING

B.1.1 The Contract Price includes all labor, materials,

equipment, and services necessary to accomplish the design and

construction required by the Contract Documents, including

applicable customs duties, transportation to the site, storage,

premiums for insurance and bonds required by the Solicitation

Documents and/or the Contract Documents, permits, license,

and inspection fees, and all other items called for by the contract

or otherwise necessary for performance of the contract. The

Contract Price may be adjusted only by a written Contract

modification signed by the Contract Officer.

7

(...continued)

Ross served in this position from October 2, 2002, until January of 2004, and

lastly from January 2004 through June 17, 2005, Sharmeena Salam-Haughton

was employed in this capacity.

10

B.1.2 The contractor shall complete all work, including

furnishing all labor, material, equipment and services as called

for and required by the terms and conditions of this contract

document and all attachments hereto. The maximum time

allowable for performance has been identified on the SF Form

1442 at the time of Request for Proposal (RFP) Issuance. The

actual time set for performance and completion shall be

negotiated and set forth in the contract at time of award. The

price is firm fixed-price and shall include all labor, materials,

overhead and cost for insurance required by Section/Paragraph

I.42, 52.228-3, Workers’ Compensation Insurance (Defense

Base Act).

....

B.2 CONTRACT PRICE - CONTRACT LINE ITEM

NUMBERS (CLIN)

PROJECT TITLE: Dushanbe NOB

0001 The contractor shall complete all work, including

furnishing all professional services, labor, material, equipment

and services, unless otherwise specified herein, required under

this contract for the following firm fixed price and within the

time specified herein. This price shall include all labor,

materials, overhead insurance and fees, and profit.

....

B.3 TYPE OF CONTRACT

This contract is a Firm Fixed-Price payable entirely in the

currency indicated on the SF1442. No additional sums will be

payable on account of any escalation in the cost of materials,

equipment or labor, or because of the contractor’s failure to

properly estimate or accurately predict the cost or difficulty of

achieving the results required by this contract. . . . Changes in

the contract price or time to complete will be made only due to

changes made by the Government in the work to be performed,

or by delays caused by the Government.

....

B.5 COST OF MATERIALS/EQUIPMENT

The cost of any materials or equipment required in conjunction

with the services rendered herein shall be included in the

proposed firm fixed-price.

JX 1 at 13-14.

11

The SOW, which is Section C of the solicitation, includes the following

concerning geotechnical work:

The Contractor shall engage the services of a geotechnical

consultant to perform all necessary geotechnical work for the

project. . . . The Contractor’s geotechnical engineer shall review

all available geotechnical information provided in the Contract

package and become familiar with the soil and site conditions at

the project site by visiting the site. During the site visit and in

subsequent phases of the project, the Contractor shall examine

and/or verify the information provided and obtain any additional

information to complete the design and construction of the

project. The Contractor remains solely responsible and liable

for design sufficiency and should not depend on reports

provided by the USG as part of the contract documents.

JX 1 at 26. Additionally, the SOW provides,

The geotechnical consultant shall be consulted during the site

design to provide recommendations and design for site retaining

structures, ground modification[] methods, pavement structural

design, and subsurface drainage.

JX 1 at 31. The SOW continues with the following directions about the

geotechnical consultant’s role in the project:

The geotechnical consultant shall continue providing services

during construction, especially during the construction of

foundations, pile loading test, ground modification, retaining

systems, etc. to confirm the recommendations provided during

the design stage of the project.

JX 1 at 34.

Pursuant to Section F of the contract, KI was required to submit a report

detailing its geotechnical investigation 57 days after the date of the first Notice

to Proceed. Similarly, it was the contractor’s responsibility to visit “the project

site and verifying all pertinent site conditions.” JX 1 at 83. The contract also

referenced an attachment, J.3.7 “Dushanbe Geological Overview,” which

provided the following general description of the geotechnical conditions:

12

From the engineering and geotechnical standpoint, the site is

suitable for the proposed NOB. However, due to the geologic

setting of the entire city as well as the high seismicity of the

area, additional site development costs may be anticipated

including sub-grade preparation and foundations, re-grading/fill

of the site, and utilities.

Dushanbe is located in a region in which collapsible silt/clay

soils occupy the upper 15-18 meters. These soils are very

sensitive to moisture and require special foundation sub-grade

preparation. Below the silt/clay layer, alluvial sand and gravel

soils extend to a depth greater than 50 meters. The permanent

water table may exist at much shallower depths at this site. For

a NOB up to 3 stories in height, a mat foundation is anticipated

as the most likely system to support the proposed structure. For

heavier structures, piles may be required. Both systems are

commonly used in Dushanbe. Further geotechnical studies are

required to confirm our findings. A thorough geological

investigation of the site is currently in progress and will be

completed within the next few weeks.

According to the local Geologic and Foundation Institute, the

site is located in seismic zone 9 (per Soviet standards). OBO’s

level of seismicity defines Dushanbe as zone 4 per UBC.

Regardless, the seismicity level is considered very high and any

future structures need to be designed accordingly. As compared

to other locations, the site has a thicker overburden of

collapsible soils.

JX 11 (emphasis added); see also JX 1 at 109.

The contract incorporated FAR 52.211-12, giving the government

authority to assess liquidate damages, which initially were set at $8,500.00 per

day. With respect to excusable days of delay, it provided that “[t]he Contractor

will be allowed time, not money, for excusable delays as defined in FAR

52.249-10.” JX 1 at 48. Excusable delays include, among other things, “(1)

acts of God or of the public enemy, (2) acts of the United States Government

in either its sovereign or contractual capacity, (3) acts of the government of the

host country in its sovereign capacity, . . . (11) delays in delivery of

Government furnished equipment and (12) unusually severe weather.” JX 1

13

at 48.

Division 1 of the contract, which was included in the solicitation

pursuant to M001, contained provisions about security details, temporary

utilities, and the schedule of values. The contract required the contractor to

invoice the government for periodic payment based on the percentage of work

completed for each line item on a schedule of values developed by the

contracting officer and to include on the invoice a certification stating that the

contractor had paid its subcontractors and suppliers.

The security measures described in Division 1 were necessary to

maintain the integrity of the CAA. One of the ways to ensure the security of

the CAA is to limit access by “[u]ncleared personnel” unless “accompanied by

a [Construction Surveillance Technician] CST.” JX 14 at 5. In order for

foreign nationals to be cleared for access to work on the CAA, they had to

“submit to a background investigation and be approved by the [Site Security

Manager] SSM before access is granted to Project Site.” JX 14 at 4. If the

foreign national’s application for access to the site was pending but not yet

approved, the Site Security Manager (“SSM”) had discretion to permit the

foreign national to perform limited work on site.

In addition to describing who could access the CAA during

construction, and in order to maintain the integrity of the CAA once built,

Division 1 also set out procedures for securely producing and shipping to the

site the materials incorporated into the CAA.8 Once the modular panels that

were to be used as floors and walls were built in New Jersey and certified as

compliant with relevant security precautions, containers of materials or

modules traveled to the project site in Dushanbe, where security officers would

“de-certify” the container. This involved the following: “1.) inspection of

container exterior and dunnage wall, 2.) removal of dunnage wall by

contractor, 3.) removal of all material by contractor in accordance with site

security procedures and 4.) inspection of interior of container by decertifying

officer.” JX 15 at 9.

Once the secure shipment was inspected it would be moved “to [a]

secure storage area until required for installation in CAA.” JX 14 at 16.

8

The details of secure shipping and production are classified and will not be

described.

14

Elsewhere the contract provided that “[t]he Government shall consider

noncompliance with the security regulations by the Contractor or his

employees, subcontractors, suppliers, etc. to be sufficient grounds for

termination of the contract for default.” JX 1 at 84.

The government also maintained the right, after a secure shipment was

complete, “to determine whether products have been compromised and

therefore cannot be used in a CAA or contiguous space. Where such

compromise results from the Contractor’s failure to comply with security

procedures, the Contractor shall bear entire cost associated with rectifying

compromise and restoration of fundamental secure nature of product(s)

affected.” JX 14 at 7-8. Division 1 provided, however, that “[i]n instances

where authorized work must be disassembled, uncovered, or demolished to

accommodate inspection and then reassembled, recovered, or rebuilt, resultant

costs of such actions shall be borne by Government where inspected work is

found to be in conformance with Construction Specifications and security

requirements.” JX 14 at 19.

Regarding utilities, Division 1 required the contractor to provide

temporary water, sewer, electrical power, and telecommunications, throughout

the course of the project. The contractor was directed to “[c]onnect to existing

franchised utilities for required services, where reasonably possible.” JX 12

at 5. “At the earliest reasonable date, [the contractor should] connect with

permanent utility lines and service connections, and remove temporary

utilities/services; comply with the Project Director’s requests.” JX 12 at 6. In

addition to temporary utilities, the contractor was obligated to provide

temporary office facilities and equipment, including computer systems.

E. Performing Phase I

In November of 2002, KI submitted an initial design, which the

government rejected in part because the design for the foundation was

deficient. KI then sent LBG representatives to Dushanbe in January of 2003

to test the soil conditions and recommend a foundation design. LBG issued a

draft report in late March that agreed with the SANIIOSP findings and

recommended the same approach contained in the earlier SANIIOSP

geotechnical report, i.e., attempting to compress the foundation soils by an

extensive flooding and de-watering system.

DOS eventually approved KI’s Phase I plan to use a modular approach

15

to constructing most of the embassy structures. The NOB, for example, was

assembled of six sided metal boxes, approximately 10 feet wide, 10 feet high,

and 30 feet long. Each module weighed anywhere from 30,000 to 100,000

pounds. These boxes were fabricated at KI’s New Jersey plant in a process

that started with constructing a six-sided steel frame, pouring concrete in the

base, building walls, and then adding finishes like drywall, flooring, and

infrastructure for utilities. Then the modules were shipped via boat and train

to Dushanbe where they were stacked up on the foundation to constitute the

building. Once the module was hoisted into place with a crane, KI employees

would weld them together. The process would repeat as more stories were

added to the building. Over 200 modules were used in the construction of the

Dushanbe NOB.

III. The Dushanbe Project: Phase II

A. Continued Negotiations Over Price

Although M002 reads as if it were a complete agreement by the parties,

KI took the position early on in contract performance, and argues in this

litigation, that M002 left room for the parties to revisit the contract price,

specifically in connection with what it would cost plaintiff to do the

preliminary work (geotechnical) for the foundations. Mr. Lefkus testified that,

when KI agreed to M002, it did so with the understanding that the parties

would renegotiate a firm fixed price once Phase I was complete and that KI

was not at risk because, even though it had agreed to perform the project for

a GMP of $60.7 million, that did not obligate KI to a specific type of

performance when there was no agreed upon design. Mr. Lefkus believed that

the sole function of M002 was to secure the funding that was available in

fiscal year 2002, which would have otherwise lapsed on October 1, 2002. This

is contrary to Mr. Sutherland’s understanding that under M002, the

government could require the contractor to perform the contract as written for

the agreed upon price.

Mr. Sutherland was willing, however, to discuss an adjustment in price.

In an effort to negotiate a mutually acceptable price, Mr. Sutherland met on

May 1, 2003, with KI representatives, including Alan Rand,9 who was newly

9

Mr. Rand had proposed $69.5 million as a firm fixed price for the contract

(continued...)

16

appointed by KI as its Vice President for Federal Contracts, and who was

given responsibility for overseeing the Dushanbe project. In a letter dated May

2, 2003, Mr. Rand, wrote the following to Mr. Sutherland:

As we discussed on May 1, we will treat the unknown and

unforeseen geo-technical issues as a change to the base line

price comparison. Therefore, we have not included a price for

this work in the attached Final Price spreadsheet. We are,

however, prepared to provide OBO with a “hard” number as part

of a change to the base line price for this project.

JX 191 at 2. Mr. Sutherland responded by referring to the agreement

established in M002. He wrote the following in a May 6, 2003 e-mail to Mr.

Rand:

On September 30, 2002 we reached a mutual agreement on

$60,730,000 for Phase II design, construction and fabrication.

This consisted of a promise by KI to complete all work required

for a guaranteed maximum price (GMP) of $50,730,000, plus an

allowance of $10,000,000 for transportation. . . . While the

Government was willing to take the risk that transportation costs

could move up or down as an allowance cost, we fully expected

KI to perform the work at or below the guaranteed maximum

price as promised in accordance with the terms of the contract.

JX 195 at 3.

Mike Ross, the OBO Project Executive who worked with Mr.

Sutherland on the Dushanbe project, joined the conversation by e-mailing Mr.

Rand: “When John [Lefkus] submitted his proposal on Sept. 30, he took no

exceptions to the contract. Now, 7 months into the project, I’m not sure if

there is anything he doesn’t take exception to.” JX 195 at 2. Mr. Rand

responded to both Mr. Sutherland and Mr. Ross that “I hope that I have been

clear with regard to the items that are not included in our price i.e. . . . geotech

9

(...continued)

on April 21, 2003.

17

work.” JX 195 at 1. On May 7, 2003, Mr. Ross wrote10 to Mr. Rand the

following:

You’re not at all clear. You’re [sic] proposal of Sept. 30, 02

provided a guaranteed maximum price for the construction of

the building and took no exceptions to the contract as you are

mentioning below. The only allowance you mentioned in the

proposal was for transportation. If the geotech work turns out

to be a differing site condition you will pursue it as such. Your

delays in completing your foundation analysis are your

responsibility.

JX 195 at 1.

Meanwhile, Mr. Prior, Mr. Sutherland, and Mr. Ross agreed among

themselves to reserve $2 million in funding to be used in the event that KI

proved that it was entitled to an equitable adjustment for differing site

conditions. Prior to the in-person negotiations that occurred in May 2003, Mr.

Sutherland prepared a “pre-negotiation plan,” which states that “the

Government will take the position that [the geotech] contingency is covered

by the Differing Site Conditions clause of the contract” when KI requests, as

anticipated, “$2 million for unknown geotechnical conditions.” JX 1341 at 3.

Final negotiations concerning Phase II were held on May 8, 2003, in

Arlington, VA. Mr. Sutherland, Mr. Prior, and Mr. Ross represented the

government and Mr. Lefkus, Mr. Rand, and two others attended on KI’s

behalf.

Following the May 2003 negotiations, Mr. Sutherland recorded that the

parties agreed to convert the contract from a guaranteed maximum price to a

firm fixed price and to raise the contract price by $2 million by changing the

$10 million transportation allowance into a $12 million fixed price item. JX

1342 at 3. He also wrote, “The Contractor’s proposed $2 million for unknown

geotechnical conditions was considered by the Government to be an

unjustified contingency and was rejected.” JX 1342 at 3 (Price Negotiation

Memorandum). That change was later confirmed in M004, discussed below.

10

Mr. Lefkus, Eduardo Gaarder, Mr. Prior, and Mr. Sutherland were copied

on this e-mail. JX 195 at 1.

18

The third interim notice to proceed was issued by Mr. Sutherland on

May 8, 2003, which authorized KI to “[p]roceed with mobilization and site

preparation, not to exceed $1,000,000.” JX 198 at 1. Thus, the project moved

forward as negotiations over price continued in May 2003.11

In a May 14, 2003 e-mail to employees of Greenway Enterprises, KI’s

main subcontractor on the Dushanbe project, Mr. Kosinski explained KI’s

understanding of how the parties would address the geotechnical work in light

of the negotiations in the following way:

We have agreed to approach the geotech remediation work as a

“separate issue” in terms of both cost and schedule. This will be

addressed later on with a change order. What this means to you

is that for the time being, you need to submit your schedule

based on the assumption that we do not have to do any of the

geotech prep work. . . . Based on this we will back out the

$874,958.00 from your contract amount for the geotech, and the

revised baseline schedule will show a contract completion of

June 24, 2004. Once the actual cost and schedule impacts are

confirmed, we will submit a change order to OBO for the

additional cost and time.

JX 200 at 1.

Mr. Sutherland also understood that the geotechnical work would be the

subject of a possible change order, although he probably had a different

understanding than KI representatives as to what that meant. As he testified

at trial:

The government’s position was always, unless you show

us that there’s some sort of differing site conditions, we’re not

going to allow that. So we stuck with that position, and, as far

as the government was concerned, they were never able to prove

that, though – we never added it during negotiations, even

though Kullman would have liked to have seen an extra $2

11

Chris Matise, KI’s Project Manager, arrived on site in Dushanbe on May 12,

2003. KI submitted its detailed project schedule on May 15, 2003, which was

later approved by the government on May 30, 2003.

19

million for that contingency. That’s exactly what it was. It was

contingency in our eyes.

We felt, well, we should prepare for the contingency, but

since they haven’t yet demonstrated to us that it is a differing

site condition, we’re not going to put it in the contract.

Tr. 2216-17 (Sutherland).

The final adjustment to price was captured in M004.12 M004 made

several changes to the contract. As discussed above, the original guaranteed

maximum price of $60,730,000 was changed to a firm fixed price of

$62,700,000.00, which resulted in an overall increase in the total contract price

of $1,970,000. Also, the contract completion date was extended to June 20,

2004. Finally, the potential daily liquidated damages was decreased from

$8,500 to $3,380.

M004 also incorporated other documents into the contract. First, it

referenced a May 1, 2003 classified document on the “Dushanbe Chancery

Ceiling Heights” given to KI by Mike Ross. Second, the May 29, 2003 letter

from KI was also incorporated into M004. In this letter, John Lefkus

memorialized the following understanding:

Final [notice to proceed] to be issued by June 1st or before. This

references DS Certification. Contract will be adjusted if the

[notice to proceed] is not issued by then. Contract is extended

65 days for a June 20, 2004 completion. This extension takes

in[to] account the weeks to the [notice to proceed] and previous

suspension and delays.

JX 5 at 5. The letter continues, “The government acknowledges that with the

exception of a single DS condition, no other outstanding issues remain for DS

Certification.” JX 5 at 5. KI’s letter does not mention the geotechnical issue.

Although M004 was not signed by Mr. Sutherland until August 7, 2003,

12

M003, which is dated December 12, 2002, clarified that certain work had to

be performed by workers that had obtained security clearance at the secret

level. JX 4 at 1.

20

and Mr. Lefkus on September 16, 2003, it was given an effective date of May

29, 2003. May 29 was also the date that KI was issued the unlimited notice to

proceed. Plaintiff makes much of the fact that KI waited to execute M004

until it submitted the differing site condition request for equitable adjustment,

but we attach no contractual significance to that fact.

B. Geotechnical Work

1. Breaking Ground: The Geotechnical Work Begins

On June 1, 2003, Catherine Wilkins arrived on site to serve as the OBO

Project Director. There was a ground-breaking ceremony held at the site on

June 10, 2003. General Williams, Suzanne Conrad, Antonio Delgado, Thomas

Quinzio, Mike Ross, Kevin Sarring, Barbara Richter, Jay Neustel, and Bob

Cult from OBO and Mr. Lefkus, Mr. Rand, and Mr. Kosinski from KI were in

Dushanbe for the ground-breaking ceremony and the pre-construction

conference.

Even after the work began on site, the parties continued to quibble over

how the geotechnical work would be financed. As the newcomer, Ms. Wilkins

was told by KI that the geotech “work is specifically not included in [KI’s]

contract at this time and that they are preparing a price proposal to be

negotiated.” JX 219 at 1. In light of KI’s assertion, Ms. Wilkins e-mailed Mr.

Sutherland and Mr. Ross on June 18, 2003, to reaffirm that the government’s

position was that “the government expects the contractor to proceed with the

construction, and, if they feel that the geotech work is not in their contract, to

file a request for equitable adjustment.” JX 219 at 1. Mr. Ross responded on

June 25 with the following:

The government does not accept any claim from the

contractor that the foundation is not in their contract. They have

never given us anything in writing to that effect nor have they

mentioned an exclusion. They have a design-build contract that

includes putting the building on a competent foundation.

....

Further, it has been explained to them that any request for

equitable adjustment must be presented to the contracting officer

with a comprehensive schedule and cost analysis attached.

21

Otherwise we have nothing to talk about.

JX 224 at 2. After receiving this message, Ms. Wilkins wrote back to Mr.

Ross informing him that the contractor was threatening to suspend work until

there was a signed contract modification addressing this issue. Mr. Ross then

e-mailed Mr. Alan with the following note:

What Catherine is telling me is NOT what we agreed. You told

me at site last week that you would proceed with the foundation

work and once you determined what, if anything, was a differing

site condition, you would apply for a request for equitable

adjustment.

As of now, the Government does NOT agree that this work is

not in your contract and if you delay the project and fail to prove

otherwise, you’re going to be on the hook for making up the lost

time.

I would suggest that you get rolling with the foundation work

and start putting together your RFEA if you believe you are

entitled to one.

JX 224 at 1. Mr Sutherland echoed these sentiments two days later when he

e-mailed Mr. Rand and instructed KI to “Get Going!” with the site work. JX

225 at 1. In this e-mail, Mr. Sutherland reminded Mr. Rand of KI’s obligation

to prosecute the work diligently. Mr. Sutherland wrote, “I have yet to see any

evidence that there are in fact any differing site conditions relating to soils or

any other geotech concerns. So far it’s been speculation. The contract does

not provide for any delay of work based on unsupported speculation.” JX 225

at 1.

Despite the foregoing, Ms. Wilkins’ Project Director Summary for July

2003 characterized contractor relations and customer satisfaction as “good.”

JX 60 at 1.13 The project status was characterized as “green,” or positive, even

though “[c]onstruction activity in the field has been slow to get started.” JX

13

In this document, Ms. Wilkins also reported that the contract completion

date was June 20, 2004, although the “[s]tatus of mod #4 not confirmed.” JX

60 at 2.

22

60 at 1. Ms. Wilkins recorded that excavation, grubbing, grading, and soil

wetting had begun. JX 60 at 2. Joseph Allen, KI’s Site Superintendent who

worked on the geotechnical and soil remediation efforts, recalled the

following:

[T]o remedy those [poor and collapsible] soil conditions, there

were some processes we had to do after we excavated to get the

soil prepared for the load that was going to be put on it . . . .

So it was a process of excavating, flooding the area,

having it hold standing water. And – and that was for, if I

remember correctly, I think it was for 28 days was what the

requirement was. And then you remove that, you excavate a

portion of it, compact it, test the soil.

Tr. 824-25. KI sent the test samples to LBG for analysis. KI repeated this

process for several months with little resulting soil settlement. LBG released

a report, JX 420, in March of 2004 that concluded the soils had settled only

2 centimeters as a result of the compaction efforts.

2. KI Submits a Request for Equitable Adjustment and

Then Signs M004

Before the results of the settlement efforts were known however, on

June 9, 2003, Mr. Ross sent KI the cost estimate forms to complete and submit

along with the request for equitable adjustment (“REA”) concerning the site

conditions. KI submitted its differing site condition REA to Mr. Sutherland

on August 15, 2003. The REA asserted that the geological conditions were

“extreme and differ[ent] from standards applied at the time of the initial

contract award/[notice to proceed] and during negotiations.” JX 22 at 3. In

the REA, KI requested a monetary adjustment of $3,032,915 and a time

extension that would move substantial completion to November 15, 2004. The

time extension was requested because KI estimated that “an eight-week time

period” was necessary for soil subsidence. JX 22 at 6. In its submission, KI

asserted that the equitable adjustment was warranted because “during final

contract negotiations, all costs and schedule impact that relate to the

geotechnical work were specifically excluded from the negotiated price

pending issuance of the final geotechnical report, completion of the

structural/geotechnical design effort, and cost and schedule analysis.” JX 22

at 3.

23

Mr. Lefkus signed M004 on September 16, 2003. At the time that KI

submitted its REA and executed M004, the remedial geotechnical work was

not included in the Schedule of Values. JX 214, JX 230, JX 237, JX 250; see

Tr. 2442 (Lefkus) (“[W]e had not yet acknowledged the contractor’s obligation

to do those [geotech] activities because they did not appear on the schedule.”).

3. The Site Work Continues

As August 2003 came to a close, Ms. Wilkins described the project

status as “yellow,” and the contractor performance as “significantly behind

schedule.” JX 61 at 1. Ms. Wilkins recorded that “[e]xcavation was

completed during the month of August at the building footprints” but “[s]oil

wetting operations continued at the perimeter wall foundations.” JX 61 at 1.

a. Delay

In September 2003, Ms. Wilkins’ characterization of the project status

changed to red, which she testified meant that there was a serious problem

because the contractor was behind schedule. KI was so far behind schedule

at this point that Ms. Wilkins wrote, that KI was “unlikely to complete within

the contract performance period.” JX 62 at 1. She estimated that the job was

20.35% complete. JX 62 at 2. Ms. Wilkins recorded that “[a]ctivity at the site

continues to focus on the geotechnical work required to prepare the soil prior

to construction of the foundations.” JX 62 at 1.

b. Geotech is Added to the Schedule of Values

In order to receive periodic compensation for work performed, KI

submitted invoices to the agency. It billed for the percentage of work

completed for each line item on a Schedule of Values (“SOV”). The SOV

submitted by KI with the August 2003 invoice showed a line item of $12

million for transportation and did not include a line item for geotechnical

work. JX 250. The September 2003 invoice is the first one submitted by KI

that included a line item for geotechnical work, valued at $3,032,915. This

entry corresponded with a reduction in the transportation line item in the

September 2003 schedule of values, which became six new line items titled

“Transport Modules from Port to Site” with a total value of approximately $8.8

million. JX 270 at 15.

Although KI had initially excluded line items for geotechnical work in

24

the SOV,14 inclusion of these line items became the topic of discussion at the

end of September 2003. Mr. Ross wrote the following to Mr. Rand on October

1, 2003: “Per our meeting with Anne last week, you were going to adjust your

schedule to reflect the geotech work. Those activities and there [sic] values

should then be exported to your schedule of values.” JX 119 at 897.

14

The SOV originates with the contractor and is then reviewed and approved

by the government. Tr. 209 (Farley). The contract states:

Before the first progress payment under this contract becomes

due, the contractor shall prepare a Detailed Estimate for

Progress Payments itemizing the Contract Price in the form and

in such detail as is required by the Contract Documents. The

values in the Detailed Estimate will be used as a basis for

determining progress payments, but will not be conclusive as to

the amounts due the Contractor or as to the value of changes in

the work. The Contractor’s overhead and profit shall be

prorated throughout the life of the contract.

JX 1 at 60. The contract documents further prescribe:

1. The Contractor shall submit applications for progress

payment monthly.

2. Monthly Progress Payment applications shall be:

a) Substantiated by progress report submittals, as

specified.

b) Consistent with previous applications.

c) Accurately coordinated with the Schedule of

Values produced by the progress cost loaded

schedule process defined in Section 01314,

Project Schedules.

d) As directed by the Project Director,

coordinated with required meetings, inspections,

certifications, and similar actions.

e) Submitted subsequent to completion of

specified prerequisite work elements for which

partial payment has been requested.

JX 57 at 14-15.

25

KI did include a new group of line items under the heading of

“GeoTech” that totaled $3,032,915 in its September invoice. JX 270 at 12-13.

The bottom line contract value did not change in order to accommodate these

new line items. Rather, the transportation budget of $12 million was broken

down into smaller line items that then totaled to just short of $9 million. In

other words, money was moved from transportation to geotechnical work,

although the overall contract amount remained the same. Mr. Rand testified

that he discussed this change with Mr. Ross and Ms. Wilkins and obtained

government approval to move funds from the transportation line item to the

newly created line item for geotechnical work.

Around the same time that the geotechnical work was included within

the SOV, representatives from the government met with members of KI to

discuss the geotechnical issues raised in the REA. JX 24 at 1 (stating the

meeting occurred on October 16, 2003). At this meeting, “KI/LBG

representatives confirmed that soil samples brought back to the United States

and tested were consistent with the [SANIIOSP] report.” JX 24 at 4.

At the end of October 2003, Ms. Wilkins recorded in her Project

Director’s Summary that progress had been made on the geotechnical work,

but the soil wetting and monitoring phase was not complete. JX 63 at 1. KI

also prepared a monthly progress report for October which stated that the

contractor “continue[s] to anticipate approximately two months of field

activities that relate almost exclusively to the geotech effort.” JX 94 at 1. KI’s

prediction proved true as Ms. Wilkins reported in both her November and

December Project Director’s summaries that the contractor continued to flood

and monitor the soils. JX 64 at 1, JX 65 at 1. As indicated above, after

months of soil wetting, excavation, fill and drying, there was virtually no

settlement.

c. The Government Denies the REA

On November 12, 2003, Mr. Sutherland sent a letter to KI denying the

REA. JX 24 at 1. The letter provided the following:

Section C of the contract requires the Contractor to perform

geotechnical services in Dushanbe. Since execution of the

contract, the Government has not made any changes to the

contract requirements regarding performance of geotechnical

activities. The contract does not contain any exceptions or

26

special provisions providing for additional consideration to

perform required geotechnical services. As a result of reviews,

evaluations, and discussions, the Government has determined

that the REA does not support any adjustment to the contract

price or performance schedule. Therefore, the REA is denied in

its entirety.

JX 24 at 1. Additionally, Mr. Sutherland noted that KI received “Section C”

of the contract on July 2, 2002, which included clauses C.2.8 and C.4.2.5 that

included geotechnical activities within the scope of work, and that the July 12,

2002 solicitation included attachment J.3.7, which should have put KI on

notice of the potential geological issues at the site. Mr. Sutherland also wrote,

The RFP and the contract contain FAR clauses 52.236-3, Site

Investigation and Conditions Affecting the Work (APR 1984).

The clause states that the Contractor has investigated and

satisfied itself of conditions that can affect the work or its cost,

including ‘the confirmation and conditions of the ground.’ The

clause goes on, ‘. . . . The Contractor also acknowledges that it

has satisfied itself as to the character, quality, and quantity of

surface and subsurface materials or obstacles to be encountered

insofar as this information is reasonably ascertainable from an

inspection of the site, including all exploratory work done by the

Government . . . failure of the Contractor to take the actions

described and acknowledged in this paragraph will not relieve

the Contractor from responsibility for estimating properly the

difficulty and cost of performing the work without additional

expense to the Government . . . The Government assumes no

responsibility for any conclusions or interpretations made by the

Contractor based on information made available by the

Government.’

JX 24 at 3.

Mr. Sutherland noted that “KI’s decision to hold off sending a

geotechnical engineer to Dushanbe until January 2003 showed negligence and

likely contributed to delays.” JX 24 at 4. Regarding the September 30, 2002

GMP, Mr. Sutherland wrote, “Although the final offer did include some

mutually agreed upon conditions, it did not include any conditions regarding

geotechnical issues.” JX 24 at 4 (underline in original). Mr. Sutherland

27

concluded, “Based on field reports and observations, it is believed that

Kullman Industries failed to prosecute the geotechnical work diligently, as

required by [the] contract.” JX 24 at 8. DOS architect Vassilios Magginas

wrote in the analysis attached to Mr. Sutherland’s letter, “I do not see any

reason why OBO has to pay for something extra for a design decision made by

[KI] and, overall, is a requirement of the project.” JX 24 at 13.

4. Retainage and Liquidated Damages

The government began retaining a portion of KI’s progress payments

in April of 2003 pursuant to Federal Acquisition Regulation Part 52.232-5(e)

(2003), which provides,

(e) Retainage. If the Contracting Officer finds that satisfactory

progress was achieved during any period for which a progress

payment is to be made, the Contracting Officer shall authorize

payment to be made in full. However, if satisfactory progress

has not been made, the Contracting Officer may retain a

maximum of 10 percent of the amount of the payment until

satisfactory progress is achieved. When the work is substantially

complete, the Contracting Officer may retain from previously

withheld funds and future progress payments that amount the

Contracting Officer considers adequate for protection of the

Government and shall release to the Contractor all the remaining

withheld funds. Also, on completion and acceptance of each

separate building, public work, or other division of the contract,

for which the price is stated separately in the contract, payment

shall be made for the completed work without retention of a

percentage.

The government’s rationale for the initial withholding was unsatisfactory

progress with the design. Then, as geotechnical work threatened satisfactory

progress on the rest of the project, the government once again justified

retaining a small percent of KI’s progress payments.

Mr. Rand wrote to Mr. Sutherland on December 5, 2003, describing the

impact of the government’s decision to retain part of KI’s progress payments:

[T]he recent lack of payment and withholding by the

government has created an intolerable condition . . . .

28

Withholdings for non-payment of applications not in terms

(September and earlier) is over 30% of the [sic] Kullman’s

undisputed earnings. I believe that the lack of payment for

approved undisputed work technically constitutes a breach by

the government. . . .

This lack of cash flow has a direct negative impact on the

project team and the project’s success. . . . Professional

consultants along with foreign and domestic subcontractors

struggle with large outstanding balances for work that has been

performed and approved.

....

During the meeting, Mike Ross made me aware of OBO’s

rationale for withholding 10% of each of Kullman’s invoices.

His rationale is schedule related and is directly attributed to the

geotech work now taking place. If we were able to show a

geotech recovery plan related to schedule, all sums currently

retained would be returned to Kullman.

JX 303 at 1. Throughout the contract, the government continued to

periodically exercise its right to withhold up to 10% of the value of KI’s

invoices and at no time did the government exceed its authority to collect

retainage pursuant to the FAR. The total retention withheld by the government

at the end of the contract was $2,187,022.

On June 18, 2004, Lisa Goodwine, the contracting officer at the time,

sent Mr. Rand formal notice that the government intended to assess liquidated

damages in the amount of $3,380 per day beginning on June 21, 2004, because

the contract completion date was June 20, 2004.15 JX 539; see Tr. 447-48

(Lowther). However, we find no reference to a formal assessment of

liquidated damages, and the government has not made liquidated damages part

15

The letter was actually signed by James G. Thomas, Jr., as the CO, and was

sent by Lisa Goodwine. However, the parties stipulated that Lisa Goodwine

was the CO for the Dushanbe project from June 17, 2004, until July 15, 2004.

Ms. Lowther explained that Mr. Thomas was the Senior Contracting Officer

in the division.

29

of its counter-claim here.

C. Security Breach & Mold Remediation

Once the foundations were in place, the construction of the Embassy

progressed until a problem was encountered with the CAA within the NOB.

Unlike the other modules within the NOB, the original intent of the parties was

that the modules comprising the CAA would be built in segregated facilities

in New Jersey by screened employees under DOS observation.16 What the

parties had to accommodate, however, is that because the CAA is room within

a room (the space between the interior room and the full expanse of the CAA

accommodates periodic inspections to verify the security of the structure), the

CAA module needed to have a ceiling height of twelve feet. The maximum

height of a module that could be shipped, however, was ten feet. As one might

expect, some of the details about this area within the Embassy are classified.

Not only is information regarding the CAA restricted, but strict security

measures were followed throughout the project in order to preserve the

integrity of this space.

The security problem created by the adaptation of the Standard Embassy

Design (“SED”) to modular construction was anticipated during Phase I. See

JX 174 (March 20, 2003 e-mail discussing CAA ceiling height design issues).

Mr. Lefkus, Mr. Rand, Mr. Sutherland, Mr. Ross, Eduardo Gaarder, Patricia

Regalo-Warren, Branch Chief within OBO, and others representing either KI

or the government met on April 1, 2003, to address the security concerns

identified during the design phase. Mr. Sutherland wrote a memorandum after

the meeting which recorded the following:

The contract is based on Standard Embassy Design (SED)

documents and attachments thereto. Design submittals [sic] to

date show the ceiling at less than the 12-foot height. The

Government maintains that the contract documents require a 12-

foot ceiling. Kullman points out that Section C of the contract

states “. . . (SED) shall be modified as necessary to execute

using off-site modular technology. . .” Kullman explained that

16

The parties called the screened workers “Cleared American Workers” or

“CAW” and the DOS employees who were tasked with observing were

reffered to as “Construction Surveillance Technicians” or “CST.”

30

it would not be practical to have the 12 foot ceiling for modular

construction because of transportation limitations, involving

oceanic shipping, rail cars in Europe, high-risk areas, low

tunnels, and other reasons. Alternative possibilities were

discussed.

. . . . Pending resolution of the ceiling issue, the Contracting

Officer has suspended all work under the contract.

JX 179 at 1. Three days after this meeting, on April 4, 2003, DOS approved

KI’s revised Construction and Transit Security Plan. This plan was originally

drafted on October 30, 2002, and revised on March 6, 2003. It included the

following language:

The goal of this plan is to facilitate the project schedule by

limiting the program to actual CAA area(s) and implementing

security measures to maintain an acceptable level of protection

. . . . [I]t is the contractor’s understanding that the CAA area(s)

impact the second and third floor modules on one specific

portion of the NOB.

JX 153 at 4. The plan went on to state that

The unique nature of modular construction lends itself to the

security aspects of this project. We can readily identify and

segregate the modules requiring special protection. Unlike

conventional construction, where contiguous areas are

connected throughout the construction process, modular

construction allows for the separation of modules containing

sensitive areas to be assembled under segregated, controlled

conditions. With modular construction, floor and ceiling

structures are not shared elements; therefore the need to control

vertically adjacent areas is eliminated.

JX 153 at 4-5. When the government approved the Construction and Transit

Security Plan, it also noted that KI had not yet submitted a Transit Security

Plan, which presumably would describe in detail the plan to transport modules

and materials from New Jersey where they were assembled to Dushanbe.

At trial, several witnesses testified that KI did indeed create such a plan

31

and that the government approved it. See, e.g. Tr. 2781-83 (Algire). The

shipping plan, however, was classified and Mr. Kullman testified that KI was

required to return to the government all classified documents once it was

terminated. Tr. 1766-67. While witnesses confirmed that the plan listed which

modules and materials were to be shipped securely, see Tr. 5031 (Charles

Kuehne, Senior Desk Officer for Central Asia and team leader for security

procedures at DOS), the details of the list are unknown to the court because

neither party produced it. Additionally, during trial, the court asked the

government to produce the classified blue prints, shipping lists, and any other

exhibits that might aid our resolution of this issue and the government was

unable or unwilling to do so. This gap becomes important, as discussed below,

because a dispute arose as to whether the materials for the mechanical suite on

the fourth floor of the NOB above the CAA had to be shipped securely.

Because the government was in the best position to produce the secure

shipping list and failed to do so, we draw the inference that the fourth-floor

floor panels were not on the list. See Huthnance v. Dist. of Columbia, 722

F.3d 371, 378 (D.D.C. 2013).

The ceiling height of the CAA was a topic of conversation during the

negotiations leading to M004. M004 incorporated a May 1, 2003 classified

document on the “Dushanbe Chancery Ceiling Heights” given to KI by Mike

Ross. The May 29, 2003 letter from KI, which was also incorporated into

M004 provides the following:

Final [notice to proceed] to be issued by June 1st or before. This

references DS Certification. Contract will be adjusted if the

[notice to proceed] is not issued by then. Contract is extended

65 days for a June 20, 2004 completion. This extension takes

into account the weeks to the [notice to proceed] and previous

suspension and delays.

JX 5 at 5. Finally, this letter acknowledges that, as of May 29, 2003, “DS”

certification was still an outstanding issue.

Mr. Rand and Mr. Lefkus once again met with Mr. Ross and others

from diplomatic security on November 6, 2003, to address this issue. Mr.

Lekus recalled that

we couldn’t achieve [the necessary ceiling height] within a

single module, but our solution was to show them, represent

32

that, while the third floor module itself could not achieve that

space, that most of that space could be achieved with its

relationship with the fourth floor floor panels, which was for the

mechanical suite.

Tr. 2391. KI brought a proposed solution to this meeting in the form of a

three-dimensional model.17 Although the model was not produced at trial, Mr.

Lefkus described it as a shoe box with lid; “the third floor module looked like

the bottom of a shoe box and the fourth floor panel looked like the top of a

shoe box.” Tr. 2393. The way in which KI proposed to solve the height issue

was by welding extenders on the floor of the fourth floor and then welding that

panel on the ten foot high third floor module. This added approximately two

feet to the standard module. Mr. Lefkus testified that the three-dimensional

model remained in the custody of the government after the meeting. Tr. 2394.

It was not introduced at trial.

When asked whether there was any discussion at the November 6

meeting about how the “lid” would be manufactured and shipped, Mr. Lefkus

responded,

A. Yeah. We understood at that meeting that the third floor,

which was cleared space, was built securely, and the

fourth floor elements, which was mechanical space, was

not built securely.

Q. Did the government understand that?

A. The focus on the meeting was the clearance. I know we

discussed, you know, the fabrication of each spaces, so

I would say they did, but that was further discussed with

their transit security team. Every piece of the building

was approved for transportation. It was either sent

secure transportation or unsecure. So every element in

the building was designated for secure. If the product

was not built secure, you’d never send it secure

transportation. Conversely, if you built something in a

secure environment, you wouldn’t send it unsecured. So,

17

Mr. Lefkus also testified that KI representatives provided “a series of plans”

and the model to illustrate the relationship between the third and fourth floor

in physical form. Tr. 2393.

33

they’re always related to each other.

The Court: When you say designated, by whom?

The Witness: It’s a process with the government to determine

what spaces they deem to be secure in nature. Some are

easy calls.

The Court: Spaces or mods? Spaces or elements of the

construction –

The Witness: Both, sir. It could be a module or it could be a

container with a product in it. So, anything that got

transported to the site – anything – whether it went in a

container, freight bulk, as a module, there was a

designated way that it was going to be transported.

The Court: Where did that designation originate?

The Witness: It designated through the government’s transit

security team and their site security by reviewing the

plans and determining an approach to transport the

project from our facility to its destination in Dushanbe.

Tr. 2397-98.

On December 10, 2003, Mr. Kosinski e-mailed Mr. Ross and other

government representatives with several attachments regarding general

shipping plans. In a December 9, 2003 letter, which was the first attachment

to Mr. Kosinski’s e-mail, he wrote that the attached “shipping plans have now

been revised to include the specific details requested and direction provided

by the USG [United States Government] during recent meetings and

discussions on this topic.” JX 306 at 2. After briefly describing the shipping

plans for the modules and some of the measures to be employed to ensure the

security of those designated secure modules, Mr. Kosinksi wrote that “[a]s

discussed during our meeting on November 6th, the panelized sections for the

NOB mechanical penthouse spaces and atrium areas do not need to travel with

the modules shipments and may follow alternate routing if desired.” JX 306

at 3. The rest of the attachments described the plans to transport three

different groups of modules from New Jersey to Dushanbe.

Once DS certification was resolved, KI moved forward with

construction of modules and panels in its warehouse in New Jersey. When

modules had to be manufactured securely, they were constructed by cleared

American workers under guard in a secure area of KI’s manufacturing plant.

There is no disagreement over the fact that the fourth-floor floor panels were

not constructed securely.

34

The next time that the subject of the panels was discussed was on July

12, 2004, when Wayne Algire, the Site Security Manager, became concerned

that the fourth floor panels were not included in the secure shipments. He e-

mailed Charles “Chick” Little, Mr. Algire’s Desk Officer and point of contact

within the Washington, DC office of OBO, and Charles Kuehne, Senior Desk

Officer for Central Asia and team leader for security procedures at DOS, JX

541 at 12, asking, “As there are no more secure shipments, that I am aware of,

how is this stuff getting here[?] . . . Is the fourth floor south wing not CAA,

just contiguous with the CAA?” JX 541 at 13. Mr. Little responded that,

although he had to reference the drawings18 before he gave a final answer, he

could advise that, “IF it is for the CAA, it needs to be securely purchased and

shipped, unless it can be randomly selected at 25% or less out of the whole of

the exact same item. If it is for non-CAA, no restrictions.” JX 541 at 12.

Then, Ms. Wilkins added the following to the e-mail chain:

The Fourth Floor immediately above the CAA on the south wing

of the building has full height parapet walls. The enclosed area

is partially open to the sky. Those walls were not shipped

secure. They cannot be randomly selected from other stock as

they are custom. They have already shipped (non-secure) and

will be here within a few days. Please advise whether we should

allow them to be installed.

JX 541 at 11. Mr. Algire agreed with Ms. Wilkins’ assessment and wrote to

Mr. Little and Ms. Wilkins, “The steel as I read the drawings is for the CAA

on the fourth floor above the CAA on the second and third floor of the CAA

south wing.” JX 541 at 8.

On July 20, 2004, Mr. Little provided his answer as follows:

I have looked at the drawings for this. I have also talked

with Sharmeena [Salam-Haughton]. . . .

....

This fourth floor for the South side is a “penthouse” a

18

These design drawings of the CAA were also classified and not produced for

our inspection at trial.

35

“mechanical penthouse”. Yes, it is covered. Why? We do this

sometimes. All the equipment that goes into this area is

procured and shipped non-secure.

This area is completely a non-CAA area. For

construction, this means locals with CSTs [Construction

Surveillance Technicians], since it is General Work area. . . .

Since the floor is contiguous, the the [sic] installation of the

floor slab itself should be by cleared Americans.

I hope this resolves the issues about the fourth floor.

This is rather normal for all NECs [New Embassy Compounds]

as far as how the area is constructed. In actuality, for NECs at

the same level as yours, general construction, which includes the

floor and ceiling slabs, can be done by locals under CST

surveillance, so in essence requiring Cleared Americans for

doing the slab is a step above what occurs on normal stick build

projects.

JX 541 at 2.

The fourth-floor floor steel panels arrived in Dushanbe sometime

between July 22 and August 20, 2004, after being constructed and shipped

non-securely. Once the panels arrived, KI began installing them. KI was able

to begin installing the panels in August of 2004 because, at this time, all of the

modules for the South side of the NOB, the side that housed the CAA, were

in place. JX 71 at 1 (OBO Project Director’s June 2004 Report); JX 48 at 129

(Expert Demonstrative showing the sequence in which each module and panel

was set in place); Tr. 934 (Allen). Mr. Allen testified that “[t]he area had –

around the building had been completely backfilled because we had set all the

modules. We wouldn’t have been able to set all the modules if we weren’t

completely backfilled.” Tr. 935. We find Mr. Allen to be a credible witness.

KI had installed 6 fourth-floor floor panels when it was ordered to stop work.

On August 20, the CO wrote to Mr. Rand to notify him that KI was

responsible for rectifying what he viewed as a security breach in accordance

with direction from OBO. The issue was framed in the following manner:

“[T]he third floor modules were fabricated and shipped without the required

steel plating. Instead, the third floor ceiling steel plating was fabricated as part

of the fourth floor modules. The fourth floor (penthouse) modules were

fabricated and shipped, unsecured, and cannot be used as part of the third

36

floor.” JX 611 at 1. In response, KI asserted that it had followed the OBO

approved plans for secure manufacturing and shipping. Ms. Salam-Haughton

followed up on August 26, 2004, with potential mitigation strategies suggested

by OBO.

Mitigation involved inspection of the panels; OBO sent a security team

to conduct the inspection on site from September 17 - 28, 2004. There were

36 panels in total, some of which were stored in the secure storage area and six

of which were already installed in the main embassy building. In order to

determine whether the panels19 had been compromised, the OBO security

team, with the help of KI cleared personnel, moved the panels to the inspection

area,20 cut holes as large as 6 inches by 6 inches in the sides, top, and bottom

of each panel so that the team could explore the interior of the panel, and then

verified that there were no listening devices or other abnormalities. This

inspection process “required the contractor to provide additional manpower for

cutting holes, a heavy lift crane with operator, [and] workers to maneuver the

panels into place.” JX 677 at 12. The OBO security team found no major

issues or anomalies, although the team noted that there was “water in the

majority of roof panels.” JX 677 at 1. KI was not permitted to install the

panels until the entire inspection was complete. Once the inspection was

complete, KI was left with the work of repairing the panels. In addition, OBO

later insisted on the installation of additional acoustic material to protect

against the possibility that the inspection had missed a listening device.

Lorri Lowther, who was returned to her former position as CO at the

end of October 2004, gave KI written notice on November 23, 2004, to

“immediately proceed with Phase II mitigation above the three specific areas

on the third floor.” JX 807 at 120. The parties, however, continued to seek a

strategy for full mitigation. On December 6, 2004, Ms. Lowther wrote the

following to Mr. Rand:

OBO agreed to four different [mitigation] options that would be

acceptable for Kullman to execute with the understanding that

19

The panels were “3 meters x 9 meters and constructed of 6” steel tube

framing, steel I-beam cross members dividing each panel into 9 sections, with

6mm steel on one side and 8mm steel on the other to enclose the panels.” JX

677 at 11.

20

KI did not remove the six panels that had already been installed. They were

inspected in place.

37

Kullman would propose their preferred option within the

following days. In discussions on December 3, 2004 with

Sharmeena Salam-Haughton and Eric Rumpf, we understand

that Kullman intends to pursue the systematic solution for Part

II consisting of ceiling tile, the enhanced gypboard [quiet rock]

and an expandable material in the voids.

This is to again advise that OBO accepts Kullman’s choice and

Kullman is authorized to proceed immediately with execution.

....

This guidance is provided to Kullman Industries to mitigate

Kullman’s improper shipment of third floor ceiling panels. The

Government will not consider an equitable adjustment for either

time or costs . . . .

Mitigation, by definition, is not a change to the contract.

JX 807 at 122-23.

Shortly after the inspections concluded, KI resumed installing the

fourth-floor floor panels. KI finished installation of the fourth-floor floor

panels on October 20, 2004. By the end of October, all of the modules and 12

wall panels had been set. In November, KI installed “all remaining wall and

floor panels at [the] NOB.” JX 76 at 1. “[S]etting and welding steel columns

and roof panels at NOB mechanical levels” continued into December. JX 76

at 1. By the end of December, the roof was in place, although the roof

membrane was not finished, meaning that the roof was not yet fully watertight.

Joseph Allen, KI’s Site Superintendent since May 2004, testified that

Dushanbe experienced an unprecedented rainy reason, which began on

November 17, 2004, and lasted into February of 2005. Because of the delay

associated with the CAA security concerns, KI was not able to complete the

roof of the NOB by the time the rains began.21 As a result water infiltrated the

21

Mr. Allen testified that KI was not able to get the roof installed and

watertight before the rains came because of the delay with the fourth-floor

floor panels. Once the floor panels were welded into place, KI had to install

“wall panels that had to sit on top of those panels that made up the mechanical

(continued...)

38

rest of the building, which had been paneled with gypsum board. Mr. Allen

recalled that the building sustained water damage and subsequently mold

damage. He testified that KI tried “to keep up with it and replace the areas we

knew were getting – that got damaged. But it got too extensive. It –

temperature was right, weather condition was right and, you know, mold just

grew.” Tr. 837.22 The mold issue was not unique to the NOB but also plagued

the other buildings being constructed at the embassy compound. See Tr. 923-

27 (Allen) (stating that there was a minor mold problem in the gate houses and

that there was a mold in the Marine Security Guard Quarters).

The mold problem in the NOB grew so severe that the OBO Project

Director ordered KI to stop work until there was an approved mold removal

strategy. All of KI resources were diverted to the mold issue, and an industrial

hygienist was brought in to assess the damage and propose a remediation

strategy. Mr. Allen recalled the process for removing the mold beginning with

closing a room and then “we’d seal off the room. So we’d seal it off. And the

reason we did that is the industrial hygienist, when – when you pull the

sheetrock off you can spread more mold spores.” Tr. 929. The crew bagged

up the sheetrock that had been ripped off the walls and disposed of it off-site.

In order to keep track of the man hours spent on mold remediation, Mr. Allen

created a spreadsheet and directed Dennis Vance, KI’s on-site Safety Manager

21

(...continued)

space on the fourth floor.” Tr. 840. Then, KI “had to bring in all the

mechanical equipment that went in that section into the building, and set that

before we put the roof on the building.” Tr. 840 (Allen). Mr. Allen recalled

that it took two months to get the waterproofing “roof on even with the rain,

which delayed us quite a bit.” Tr. 840. When asked if KI anticipated the

possibility of rain or attempted to fashion a temporary roof during the rainy

season, Mr. Allen explained that the modules had been shipped with temporary

roofs that had to be removed once the floor panels were installed and that KI

tried to build a temporary roof on site but, “[i]t was like trying to tent a football

field.” Tr. 841-42.

22

Mr. Allen contrasted the mold issue spawned by the winter rains to the

minor amounts of mold that had been encountered in late spring 2004, which

developed during shipping. There had been a few modules that developed a

small amount of mold because they had gotten wet during ocean transit. Mr.

Allen’s team eliminated the mold in these modules by cutting out the sheet

rock, removing the wet insulation, cleaning up the area, and replacing the

moldy materials with clean new materials.

39

who worked with the industrial hygienist, to input the hours for labor. Mold

remediation continued throughout the spring of 2005.

On February 9, 2005, KI submitted a formal request for an equitable

adjustment23 to cover the delay and cost of the security mitigation measures to

Walter Cate and Robert Powell, the Division Directors in DOS’ Office of

Acquisition Management. JX 807. In its request, KI asserted that it

“emphatically believes that it operated within the OBO approved construction

security and transit security plans for the factory fabrication and shipment of

the general construction items in question.” JX 807 at 4. KI wrote the

following:

Kullman communicated its intentions regarding the secure and

non-secure shipment of these items with the Government

through multiple document revisions, product models, and in

meetings during the construction and transit process. At no time

were the steel panels identified by OBO as requiring secure

shipment. Additionally, each of the secure shipping plans is

clear as to the tentative shipping schedule, route description, and

a list of the items being securely shipped.

Until August 20, 2004, and despite our thorough documentation

of the fabrication and shipment of the modules and panelized

sections for the NOB, at no time was Kullman ever notified that

the factory fabrication or shipment plans were incorrectly

implemented.

JX 807 at 4. Ms. Lowther eventually denied the REA on June 15, 2005, two

days before KI would later be terminated for default. In her letter of decision,

Ms. Lowther wrote, “I . . . disagree with your letter’s efforts to imply that OBO

is somehow responsible for or approved the improper shipping of the third

floor ceiling panels.” JX 1129 at 1.

On August 18, 2010, plaintiff filed a certified claim for the additional

security work and mitigation, seeking $1,083,734.91, which includes mold

mitigation costs for only one building: the NOB. At trial, KI reduced the

amount of the claim to $934,611.

23

KI sent an initial REA for the security mitigation to the CO at the time,

Brian Mulcahy, on September 9, 2004, which was subsequently denied by Ms.

Lowther during her second stint as CO.

40

D. Finances

1. The Audit of KI’s Geotechnical Claim

KI filed a claim on July 1, 2004, seeking $3,728,358.62 for costs

associated with the geotechnical work. In its claim, KI asserted various

theories for why it was entitled to additional compensation for the soil

remediation efforts. First, KI reasoned that “[a]n equitable adjustment is

dictated by the fact that the parties understood and agreed that the geotechnical

program was not part of the negotiated price on May 9, 2003. . . . It is now

unconscionable for the OBO to disingenuously assert that the negotiated price

included the geotechnical programs.” JX 25 at 9. If the government did not

understand KI’s position during negotiations, then KI argues that “there was

no meeting of the minds.” JX 25 at 13. Finally, KI claimed that “the

government is obtaining the soil stabilization program without paying for it.”

JX 25 at 14. According to KI, “the government was fully aware that Kullman

had not submitted and negotiated a price for the geotechnical program. In

similar situations, the courts have held that the contract may be reformed in

order to reflect the true intention of the parties . . . .” JX 25 at 14.

Faced with KI’s geotechnical claim, Ms. Lowther and John C. Sawyer,

an attorney in the DOS Office of General Counsel, turned to the Office of

Inspector General (“OIG”). On December 1, 2004, Ms. Lowther and Mr.

Sawyer met with the OIG employees, Michelle “Mickie” Selby and August

Van Dessel, and requested that OIG audit Kullman’s geotechnical claim

because the Department of State believed that it “had paid Kullman for the

items that Kullman is basing its claim on.” JX 119 at 226.

Before the audit began, Robert Powell, the Division Director in the

Office of Acquisition Management, issued his final decision regarding KI’s

July 2004 geotechnical claim on December 9, 2004.24 Mr. Powell wrote the

following with help from Lorri Lowther:

Your . . . statements make it clear that according to your claim

KI has not been paid for the geotechnical work which KI has

performed. These statements are very troubling. My staff has

made a thorough review of KI’s invoices to date and the

payments which the Government has made in response to those

invoices. This review indicates that KI has been paid

24

KI appealed this decision on January 19, 2005. JX 119 at 990.

41

approximately $2,629,547.00 specifically for all geotechnical

work. . . . The invoices reflect that KI has billed for 100% of

the geotechnical work and has been paid for the billed amount

less contract retainage. This evidence indicates the [sic] KI

either believed at some point prior to raising this claim that the

contract provided for the cost for geotechnical work and KI was

properly billing for the work performed and its associated costs,

or KI improperly charged the government for work which was

not in the contract. In either case, the evidence to date is that the

government has already paid for all geotechnical work

performed . . . . My perception is that your claim for

$3,728,358.62 is for reimbursement for work already performed

and paid for. . . . Wherefore, in light of all the above facts and

evidence I deny your claim in its entirety.

JX 26 at 9-10. Mr. Powell also pointed out that KI was required to perform its

own geotechnical analysis and had even invoiced the government for doing so

before the LBG traveled to the site in January 2003 and throughout the May

2003 negotiations: “the Department did not once indicate that soil preparation

was to be taken out of the contract nor did KI claim that soil preparation was

not part of the their GMP Phase II proposal. . . . The only allowance mentioned

in KI’s September 27, 2002 proposal was for transportation.” JX 26 at 4-5.

Mr. Powell’s puzzlement about the apparent conflict between the

premise behind the REA–KI had not been paid for the additional geotechnical

work–with the premise behind previous progress payments–that KI had

performed and been paid for over $2 million in geotechnical work–is

understandable. The apparent contradiction, of course, is that the contractor

should not have been seeking payment for work as to which it had already

been paid. The contradiction is not real, however, given the explanation for

it. As is more fully explained below in connection with how the SOV was

used, what Mr. Powell apparently did not know is that KI, with the

concurrence of OBO’s Mr. Ross and Ms. Wilkins, put geotechnical work into

the SOV and funded it by moving money from transportation to the geotech

line item. There seems to have been no objection by the contracting officers

to paying invoices on this basis.

KI’s decision to budget very little for geotechnical work, of course, was

based on the incorrect assumption that the government had agreed in advance

to approve a differing site condition claim for geotechnical work, up to $2

million. That assumption was misguided, and as we conclude below, this

42

misunderstanding was entirely of KI’s making. Unfortunately, moreover, not

only did it cause KI continual financial stress throughout the contract, but it led

to a quixotic crusade by DOS legal officers to pursue a fraud investigation of

KI, which unnecessarily poisoned the working relationship between the

parties.

“OIG conducted its review in Lebanon, New Jersey, from February 7

to February 17, 2005, inclusive.” JX 119 at 55. KI provided many documents

for OIG to review in the course of the audit, but KI did not provide any

information on its initial pricing proposal or supporting data. The auditors

were permitted to “identify information bearing on entitlement” to the claim.

JX 119 at 226. As part of the audit, the OIG looked for indicators associated

with fraudulent claims. The auditors concluded that “[t]here was no one

indicator present. The contractor was able to support the transactions OIG

selected for review and we found no exceptions that would indicate fraud.”

JX 119 at 962.

Mr. Sawyer and Ms. Lowther were privy to updates on the audit and

communicated about it via e-mail. Mr. Sawyer wrote the following to Ms.

Lowther:

In reference to the audit. It appears that Kullman did bill the

Government for the for the [sic] Geo tech [sic] and have

credited it in the books. . . . Kullman put in an REA for a

differing site condition on the grounds that the Geotect [sic] was

not in the contract . . . . Subsequently Kullman billed for the

work as if it were in the contract and we paid the invoices. I

believe this counts as an action against interest on the part of

Kullman and acceptance of our payment constitutes payment of

the debt “satisfaction and accord.” For Kullman, Inc. to have

asked for the funds now in a[] claim before the GSBCA I think

constitutes a false claim.

JX 811 at 2. Ms. Lowther responded,

WOW! You never want to believe that anyone could do

something like this, but if it had to be one of our contractors

then Kullman is the one who I would believe it of. You’re right

Kullman did first come in with the REA claiming that Geotech

was not part of the contract . . . . Once Kullman received the

denial of the REA, they started billing the government . . . .

43

JX 811 at 1. We find this professed ignorance of what KI was doing to be

inexcusable. If Ms. Lowther was genuinely surprised that KI had been given

permission to move money from transportation to geotech, then she had not

been properly briefed about events prior to her tenure as contracting officer.

A draft of the OIG audit report was issued in March of 2005. On

March 11, 2005, August Van Dessel e-mailed a draft of the Kullman Claim

Report to Fay Ropella and Alma Wolfe. JX 119 at 44. The e-mail receipt

shows that both Ms. Ropella and Ms. Wolfe received and read the draft on this

date. The March 11, 2005 draft did not contain any financial figures or

conclusions, however. Mr. Van Dessel sent another draft to Ms. Wolfe on

March 21, 2005. This draft included the following assessment: “Our audit

determined that Kullman had, through February 16, 2005, incurred $3,523,728

of costs related to the claim and $11,040,1[2]3 [sic] related to transportation

costs.” JX 119 at 51. On April 7, 2005, Mr. Van Dessel e-mailed Mr. Lefkus

a draft of the Audit Report for review and comment.

The draft of the audit report contained in JX 119 includes changes

proposed by KI in an e-mail dated April 11, 2005. This draft contained the

following language, which was ultimately omitted from the final report: “We

also determined that the claimed amounts were reasonable, allocable and

otherwise allowable in accordance with the terms and conditions of the

contract and with the cost principles set forth in Part 31 of the Federal

Acquisition Regulation (FAR).” JX 119 at 59. Mr. Van Dessel also inserted

this sentence that was provided by KI, “The Modification of the schedule of

values was a cooperative and open effort between OBO and Kullman. The

‘shifting of funds’ in the schedule never increased the fixed lump sum contract

and the Contractor only did this after communication and guidance.” JX 119

at 62. Mr. Van Dessel testified that when Mr. Sawyer was informed of the

contents of the draft audit report, he was visibly upset and annoyed. He was

also annoyed that KI had been given an advanced draft of the report and been

asked to comment on it.

On June 15, 2005, OIG held a meeting of department officials regarding

the review of the claim submitted by KI. Mark Duda, Karen Holcomb, Alma

Wolfe, Michelle Selby, Lorri Lowther, John Sawyer, and Dennis Gallagher

attended this meeting. “Mr. Sawyer prefaced the discussions by thanking OIG

for the draft report.” JX 119 at 144. “Ms. Lowther informed all that OBO was

taking over the job with the expectation of building what could be done in 60

days.” JX 119 at 144. “Ms. Lowther stated that she was receiving calls from

44

Kullman subcontractors regarding them not being paid by Kullman. Ms.

Lowther was concerned due to the fact that Kullman is certifying on their

vouchers that the subcontractors have been paid for their work.” JX 119 at

145. “Mr. Sawyer is hoping DOJ will try the False Claim.” JX 119 at 145.

“Mr. Sawyer stated that the OIG draft report released to Kullman for their

comments was being paraded through the halls of Congress and that it was

likely that OIG would be called into court to testify on behalf of Kullman.” JX

119 at 145.

The Office of Inspector General’s “Report of Audit” is dated July 2005.

Its purpose:

to determine whether amounts claimed were: (1) substantiated

as having been incurred; and (2) were reasonable, allocable, and

otherwise allowable in accordance with the terms and conditions

of the contract and with the cost principles set forth in Part 31 of

the Federal Acquisitions Regulation (FAR). OIG extended the

scope of its review to include transportation costs incurred by

Kullman through February 9, 2005, because Kullman had

adjusted this item from $12 million to $8.8 million to provide

funding to bill for geotechnical costs.

JX 118 at 3. OIG judgmentally selected and tested 82.8%, or $2,552,278, of

the geotechnical costs claimed and 82.4%, or $9,094,366, of transportation

costs. For both the geotechnical and transportation costs, OIG found adequate

support for costs tested and noted no exceptions. In sum, the audit confirmed

KI’s costs with respect to the geotechnical claim. There was nothing deceptive

about the claim, moreover, because KI knew that the agency was taking the

position that the additional geotechnical work was not part of the contract and

could only become part of the contract through a REA. If the claim had been

successful, monies would have been added to the contract and funds

presumably would have been restored to the transportation budget.

2. Kullman Industries’ Financial Practices

a. The Procedure for Obtaining a Progress Payment

Despite its financial problems, KI continued to work on the Dushanbe

project and to seek payment from the government. In order to receive a

periodic payment under the contract for overhead, profit, and “the value of

labor and materials completed and in place,” JX 1 at 61, KI would submit an

45

invoice, including a certification, to DOS based on the percent of the work

completed compared to the SOV.

i. The Schedule of Values

Much like a project budget, the SOV was a list comprised of line items

that each corresponded to a particular task or activity required to complete the

contract. Jt. Stip. ¶ 40; Tr. 1378 (Rand) (“[T]here are no subcontractors or

suppliers listed on our invoices to the government, only activities.”). The

contract price was allocated among these various line items, such that the

estimated amounts stated for all the line items added up to the contract price.

Together these various line items, and dollar estimates allocated to them,

corresponded to the SOV. As Mr. Farley, the on-site DOS Project Director,

testified, “[a] schedule of values is basically a breakdown of the contract price

or contract value into its component parts to assist in the payment process.”25

Tr. 209. Specifically, the SOV “breaks the large contract sum of $60 plus

million down into digestible pieces that you can actually evaluate and assign

percentages of completion against each of the line items in the schedule of

values and arrive at a total for the month.” Tr. 209 (Farley); see JX 57 at 15.

Arriving at the monthly percent completion for each line item on the

SOV was a collaborative process between KI and DOS.26 Mr. Kosinski, KI’s

25

This understanding of the SOV is consistent with the definition in the

contract, which provides:

The Schedule of Values is a tabulation of cost-loaded work

elements or activities as defined in the Contractor’s project

execution schedule to include all design, construction, and all

other cost elements of the project. The Schedule of Values shall

segregate major project elements to reflect design and

construction costs for each major building and area of the

project.

JX 57 at 15.

26

Mr. Farley gave the following explanation of how the parties would arrive

at the percent of work completed:

Essentially a contractor would sit down and go through the

(continued...)

46

on-site Project Manager, who was part of that collaborative process, explained

that because the SOV was an estimate made at the beginning of the job, the

value of each line item did not always match what eventually was spent on

accomplishing that task. He testified that “there weren’t direct one-for-one

correlations between everything. Once we actually got to the construction

phase, you know, the – the design was developed further along and there were

aspects of the construction work that weren’t directly identified or addressed

on the schedule of values.” Tr. 750-51 (Kosinski). One of the illustrations of

this lack of precision has been discussed previously, namely, that “[i]n the fall

of 2003, DOS and Kullman agreed that the SOV would be modified to add line

items specific to the geotech work by reallocating $3 million from the

transportation line item to the new geotech line items, so that the total contract

price did not change.” Jt. Stip. ¶ 40.

This collaborative effort to move transportation monies into the

geotechnical item had the beneficial effect, at least for KI, of giving it money

up front to cover its actual geotechnical expenses. The unfortunate collateral

effect of doing so, however, was to camouflage a fundamental disagreement,

namely, whether the geotechnical work was covered by the fixed price. By

moving $3 million from transportation to geotechnical, KI financed its earlier

activities, but it merely postponed the pain of running into the cap on a fixed

26

(...continued)

schedule of values and would mark up what he felt he was

entitled to be paid for that month, [and] submit it to our office.

Our engineers would review the various line items as proposed

that concern their particular discipline, check off on them or not.

And then I would review it, would pass it back to the contractor.

The way that we would do this is through an informal discussion

if we had disagreements with percentages or amounts that were

complete or not complete.

They would submit it to us. We would review it. We would

then discuss and resolve any differences that we may have. It

would go back to the contractor, who would then submit a clean

copy. We would review it to make sure it agreed with the

agreements that we had made. I would sign it, and that would

be the payment.

Tr. 210-11.

47

price contract.

ii. The Certifications

When it submitted invoices, in addition to attaching the relevant portion

of the SOV, KI was required27 to make certain certified representations. The

precise wording of that certification varied over the life of the contract, but the

certification relevant to the government’s fraud claim was that it “has made

full payment from the proceeds of prior payments,” and that it “will make

timely payment from the proceeds of the progress or final payment for which

request is being made, to [the] subcontractors and suppliers in accordance with

[its] contractual arrangements with them.” JX 1 a t 61.28

27

The contract incorporates by reference FAR 52.232-5(c) (1997) and FAR

52.232-27 (Prompt payment for subs). The former states that,

Along with each request for progress payment, the Contractor

shall furnish the following certification, or payment shall not be

made: (However, if the Contractor elects to delete paragraph

(c)(4) from the certification, the certification is still acceptable.)

I here by certify, to the best of my knowledge and belief, that –

(1) The amounts requested are only for performance in

accordance with the specifications, terms, and conditions of the

contract;

(2) Payments to subcontractors and suppliers have been

made from previous payments received under the contract, and

timely payments will be made from the proceeds of the payment

covered by this certification, in accordance with subcontract

agreements and the requirements of chapter 39 of Title 31,

United States Code;

(3) This request for progress payments does not include

any amounts which the prime contractor intends to withhold or

retain from a subcontractor or supplier in accordance with the

terms and conditions of the subcontract; and

(4) This certification is not to be construed as final

acceptance of a subcontractor’s performance.

28

The form and content of the progress payment application was directed by

(continued...)

48

KI’s initial invoices pertaining to the Dushanbe project did not include

any certification. Then, on November 13, 2003, Eduardo Gaarder, the Chief

of the European and Eurasian Branch of the Construction and Commissioning

Division of OBO, contacted Mr. Rand about KI’s pending application and

certification for payment. Mr. Gaarder sent Mr. Rand two example pay

application forms, noting in particular the importance of the certification. KI

began using the following certification from one of the examples provided:

The undersigned Contractor certifies that to the best of the

Contractor’s knowledge, information and belief of Work

covered by this Application for Payment has been completed in

accordance with the Contract Documents, that all amounts have

been paid by the Contractor for Work for which previous

Certificated for Payment were issued and payments received

from the Owner, and that current payment shown herein is now

due.

JX 288 at 2.

At the end of March 2004, Catherine Wilkins, the DOS Project

Director, Sharmeena Salam-Haughton, the OBO Project Executive, and Mr.

Gaarder indicated to Mr. Rand their view that the certification was not explicit

enough regarding payments made to subcontractors and suppliers. Mr.

Gaarder e-mailed Mr. Rand with an acceptable certification, which Mr. Rand

began using on KI’s subsequent pay applications. Consequently, during the

period of May 2004 through April 2005, KI submitted invoices that bore the

following certification:

I hereby certify that, to the best of my knowledge and belief, that

–

(1) The amounts requested are only for performance in

accordance with the specifications, terms, and conditions of the

contract[;] (2) All payments due to subcontractors and suppliers

from previous payments received under the contract have been

28

(...continued)

the Project Director. JX 1513 at 84 (Division I of the contract documents)

(“The Project Director shall provide to the Contractor an example form,

[which] . . . . shall delineate information required for each application [for

progress payment]. The Contractor shall comply with format as directed . . .

by the Project Director.”).

49

made, and timely payments will be made from the proceeds of

the payment covered by this certification, in accordance with

subcontract agreements and the requirements of chapter 39 of

Title 31, United States Code; (3) This request for progress

payments does not include any amounts which the prime

contractor intends to withhold or retain from a subcontractor or

supplier in accordance with the terms and conditions of the

subcontract; and (4) This certification is not to be construed as

final acceptance of a subcontractor’s performance.

Jt. Stip. ¶ 42; JX 999 at 1.

Each of the invoices at issue were prepared and certified by Alan Rand.

Mr. Rand, whom the court found to be a straightforward witness, testified that

he understood that “[t]he certification meant that we were paying suppliers in

accordance with the contracts with the government. And also the fact that the

money coming in for the project was being spent on the project.” Tr. 1267.

Mr. Rand further explained that,

I was certifying that the money that the government was paying

Kullman was being used to pay its sub and suppliers, but once

that money ran out there may have been more subs and suppliers

that still needed to be paid. But that the money came in from the

government, that money was used to pay whatever subs and

suppliers could be paid. And, in fact, Kullman paid out more

money than they [sic] had received from the government by the

end of the project in May or June.

Tr. 1453-54. Mr. Rand admitted he was aware that, toward the end of the

project, KI had to juggle payments to subcontractors and suppliers and that

Belcor, Inc. (“Belcor”), the supplier of parts related to the fuel distribution

system, had not been fully paid. Despite this, Mr. Rand believed that he was

truthful in signing the certification because all of the money received from

each progress payment was used to pay subcontractors and suppliers. KI was

retaining no funds for itself, but it was doing triage in terms of paying some,

but not all, of the amounts owed.

b. KI’s Dealings with Belcor, Inc.

KI initially ordered tanks and accessories from Belcor in February of

2004. This first order totaled $170,259, and the term for payment was “NET

50

30,” which according to Mr. Bell, meant that Belcor would invoice KI for the

items once they were delivered and KI agreed to pay Belcor within 30 days of

receiving Belcor’s invoice. Delivery of the tanks and accessories was

scheduled for June 30, 2004.

The items supplied by Belcor, including fuel tanks, day tanks, and their

accessories, correspond with line item “STF 1074 Fab Fuel tanks, piping &

ship to port” on the SOV. JX 640 at 6; see Tr. 236 (Farley). Of the total

contract funds, $435,074 was designated for this line item.

Belcor sent KI the first invoice on May 5, 2004, in the amount of

$43,475 for items delivered in accordance with the first purchase order. KI

paid this invoice in full on July 12, 2004, which was more than 30 days from

the date of the invoice but before KI billed DOS for any work attributable to

line item STF 1074. On June 29, 2004, Belcor sent KI a second invoice for

$27,808.16 for more items requested in the first purchase order. KI paid this

bill in full on August 23, 2004, which was again more than 30 days from the

date of the invoice but before KI billed DOS for any work attributable to line

item STF 1074. Belcor sent two more invoices to KI in the month of August:

August 9, 2004, in the amount of $76,855 and August 25, 2004, in the amount

of $22,120.90. These two invoices, together totaling $98,975.90, remained

unpaid until January 2005.

KI first requested reimbursement for work performed under line item

STF 1074 through invoice No. 13220, which covered work performed on the

project through August 31, 2004. KI requested half of the funds from this line

item and received the requested amount, $217,537, as part of the periodic

payment29 DOS approved on September 22, 2004. The parties stipulated that

KI received the funds from invoice No. 13220 on October 14, 2004. On

December 10, 2004, KI requested payment for the remainder of line item STF

1074 as part of invoice No. 13386, which covered work performed through

November 30, 2004. Invoice No. 13386 contained the certification. DOS

approved the payment30 on December 21, 2004, but KI did not receive the

funds until January 6, 2005. As of January 6, 2005, KI had received the full

amount of contract funds designated in the SOV for prefabricated tanks.

On December 27, 2004, Robert B. Bell, President of Belcor, wrote the

29

DOS did not withhold retainage from this payment.

30

Again, DOS did not elect to withhold retainage from this payment.

51

following in a letter to KI:

Belcor, Inc. has two invoices outstanding on this project totaling

$98,975.90 (copies attached), both of these are now out 120

days with no payment received. The terms on []your PO clearly

state “Net 30”.

Numerous calls to Kullman by Belcor have gone unanswered.

No response, no call backs, no payments. Belcor, Inc. is, as you

know, a small business, and this lack of payment is creating

undo financial hardship on our company.

I would appreciate a response from Kullman Industries, but

more importantly, fulfilment of the contract obligations by make

[sic] payment.

JX 721 at 1. This letter began a series of communications between Mr. Bell

and KI employees.

Andy Linkowsky, an employee in KI’s purchasing department,

responded via e-mail on December 31, 2004, providing a contact telephone

number and informing Mr. Bell that Mr. Rand and Stuart Frieman, the Chief

Financial Officer, had been made aware of Mr. Bell’s letter and that someone

from KI would contact Mr. Bell within a few business days. On January 10,

2005, Mr. Freiman sent an e-mail to Mr. Pearson, Mr. Lefkus, and Mr.

Kullman that contained the following:

As per our discussion on Saturday, we are sending Belcor 10M

towards the 100M we owe them. I spoke to Bob Bell of Belcor

this morning to discuss the same. Given that we are

acknowledging the debt and are sending them 10M, he remained

sane.

JX 734. As promised, KI paid Belcor $10,000 on January 13, 2005. Although

Belcor received this payment, Mr. Bell wrote to Ms. Lowther on January 13

to inform her of the remaining unpaid invoices.

After making the $10,000 payment, KI requested additional supplies

from Belcor. In response, Belcor provided a price estimate and indicated its

willingness to provide the additional items but wrote in a January 18 letter that

fulfilling the order would be a problem because “Kullman Industries is on

52

credit hold with Belcor, Inc. due to a past due balance of $88,000.00 which is

over 5 months past due. Without resolution of this outstanding obligation . .

. Belcor, Inc. cannot authorize further shipments of materials.” JX 745. On

January 20, 2005, Mr. Rand e-mailed Mr. Freiman the following message:

Stu,

KI owes Belcor approximately $88,000. We need to order an

additional $10,000 (approximately) worth of materials. Thus,

our total outstanding debt with Belcor will soon be $98,000.

I spoke to Bob Bell today. He has agreed to continue to sell us

materials, etc. However, he is looking for some type of payment

plan. The $88,000 is a very large open receivable for his firm.

I have agreed to pay him $20,000 within the next seven to ten

days. This will reduce his debt to effectively $78,000. From

that point we need some general understanding of a payment

plan that he can expect.

Please plug the $20,000 commitment into your calculations for

cash flow, etc.

JX 757.31

On January 21, 2005, KI issued a purchase order to Belcor for filler,

pipe, couplings, and an adhesive kit totaling $8,858.75. KI sent Belcor another

payment of $10,000 on January 25, 2005. Two days later, KI ordered from

Belcor another $1,878 worth of supplies, including straps for securing the

tanks.

Daniel Jordan, a KI project manager assigned to the Dushanbe project,

e-mailed Mr. Freiman on February 2, 2005, with a list of creditors “to be paid,”

one of which was Belcor. JX 779. Mr. Jordan wrote, “we owe [Belcor]

$78,975.90, but pay whatever we can spare. Bob Bell has bent over backwards

to get his material on our recent air shipment.” JX 779. Mr. Rand was copied

on this e-mail. KI paid Belcor $10,000 on February 7, 2005. The next day,

31

Mr. Freiman’s response to Mr. Rand was less than enthusiastic as he

questioned “who authorized you to make a commitment for $ without talking

to me.” JX 757.

53

Belcor sent KI invoice No. 34073 in the amount of $9,475.97. On February

23, 2005, Belcor invoiced KI another $465 and KI paid Belcor another

$10,000. KI made a $5,000 payment to Belcor on March 22, 2005.

On April 18, 2005, Mr. Bell sent an e-mail to Mr. Linkowsky at KI

checking on the status of payment. KI paid Belcor another $5,000 the

following day. This was the final payment that KI would make to Belcor. The

balance remaining at that time was $60,869.

c. The Government’s Knowledge Of KI’s Position

Before KI fell behind on its payments to Belcor, it notified the

government of its financial problems, which KI attributed to difficulties with

the Dushanbe project. See JX 303 (KI informed the government of its

precarious financial position and that “subcontractors struggle with large

outstanding balances for work that has already been performed and approved”

as early as December 5, 2003). On April 30, 2004, Mr. Lefkus sent Ms.

Lowther a letter in response to an April 13 meeting attended by Ms. Lowther,

Mr. Lefkus, and Mr. Rand. In the letter, Mr. Lefkus lists “Contractor’s Out-

of-Pocket” unpaid expenses for which the agency was withholding payment,

including the costs for geotechnical work, two unpaid invoices, and another

transportation invoice, which totaled over $9.5 million. JX 475 at 2. Mr.

Lefkus also pointed out that KI faced an additional $6.5 million in “Immediate

Future Obligations.” JX 475 at 2. In light of these unreimbursed expenses,

Mr. Lefkus informed Ms. Lowther that “[t]he project economics simply do not

work for Kullman . . . . [because of] the severity of these economic issues.”

JX 475 at 2. Mr. Lefkus conceded that “[t]he resources to float this amount of

money simply do not exist.” JX 475 at 2. To address this situation, KI sought

“a reasonable remedy where OBO can feel it maintains appropriate security

while the project funding ensures robust performance.” JX 475 at 2.

In a June 2, 2004 e-mail Mr. Lefkus once again stressed the importance

of a meeting between officials from KI and the government to discuss the cash

flow from the Dushanbe project. Mr. Lefkus sent this e-mail to Walter Cate,

the Division Director in the DOS Bureau of Acquisitions and copied Mr. Rand

and Mr. Kullman. Mr. Cate forwarded the original e-mail to Mr. Powell,

directing him to set up a meeting including Ms. Lowther. Ms. Lowther

responded internally to Mr. Powell and Mr. Cate on June 3, 2004,32 that she

32

As of June 3, 2004, KI had received the first invoice from Belcor and was

(continued...)

54

did not believe a meeting would prove useful until KI provided “HARD

DATA,” in writing, to “back-up their wild accusations” especially in light of

the fact that the contract was almost a year behind schedule, that there were

ongoing security issues, and that “[w]e have subcontractors that have not been

paid.” JX 521 at 1.

Additionally, Ms. Lowther testified at trial that subcontractors and

suppliers called her and sent her letters informing her that KI had not paid for

work performed on, or supplies provided for, the Dushanbe project. See JX

1495 (November 18, 2004 letter sent by Ms. Lowther to Mr. Rand informing

him that York International Corporation (“York”) had complained to her about

KI’s failure to pay in full); see also JX 692 (Mr. Rand’s November 22, 2004

response asserting that KI had paid York substantially more money than DOS

had paid KI for line items attributable to work performed by York).33

Despite these facts, Ms. Lowther maintained at trial that KI did not

notify DOS that it was withholding payment from Belcor. According to Ms.

Lowther, notification under the contract was a formal process. Ms. Lowther

pointed to the fact that KI formally notified her, via e-mail, of its intent to

withhold funds from Greenway Enterprises due to a dispute with the

subcontractor. Mr. Rand did,34 in fact, notify Ms. Lowther and Ms. Salam-

Haughton in writing that KI was withholding funds from Greenway

Enterprises because that subcontractor was being terminated for default.

As a practical matter, however, by January 13, 2005, Ms. Lowther

clearly knew that KI had not fully paid Belcor because Mr. Bell wrote to Ms.

Lowther informing her of the situation. Ms. Lowther responded to Mr. Bell

32

(...continued)

within the “NET 30” period for payment. KI did not invoice the government

for line item STF 1074 until August 31, 2004, but paid Belcor’s two initial

invoices by August 23, 2004.

33

Ms. Lowther testified that her role was limited to communicating with KI

about alleged shortfalls in payment to suppliers or subcontractors. She

typically did not investigate such allegations but would turn them over to her

supervisor and the Office of Inspector General.

34

According to Mr. Rand, this notification was required under the certification

because Greenway Enterprises was a major subcontractor on the project and

KI was anticipating major shortfalls due to the issues with Greenway.

55

in a February 3, 2005 letter by summarizing the applicable regulations, noting

that the “government is not privy to the information contained in any prime-

subcontract agreements” and was therefore not involved in the dispute,

pointing to the contract between KI and Belcor as the “key document” for

determining whether KI was within its rights to withhold funds, and assuring

Mr. Bell that she would remind KI of its obligation to pay subcontractors and

suppliers. JX 782. On the same day, Ms. Lowther sent a letter to KI

reminding it that “[o]fficial notification must be provided to the subcontractor

and the Contracting Officer in order to fulfill these requirements [under the

FAR] or else payment must be made.” JX 783 at 1. Ms. Lowther also

forwarded to KI her response to Mr. Bell.

While KI did not respond in writing, it did attempt to address the issue

in person. Ms. Lowther recorded the interaction in an e-mail she sent to Mr.

Sawyer:

Today was the site meeting and both Mr. Rand and I attended

the meeting and we were both very professional. However, in

the meeting they just couldn’t help themselves knowing, I was

in the room and they starting [sic] complaining how they

couldn’t pay their subcontractors because the government owed

them money for Geotech, Mitigation and blah, blah, blah.

JX 811 at 1. After this, KI continued to submit certified invoices through the

spring of 2005,35 and the agency continued to pay them.

After KI’s April 2005 payment of $5,000, Belcor continued pressing KI

to satisfy the outstanding balance of $60,869. Mr. Bell called KI, he e-mailed,

and he threatened to get DOS involved; all to no avail. Although Mr. Bell did

not know it at the time, during May through July of 2005, KI was winding

down construction on the Dushanbe project and preparing to abandon the job.

IV. Termination for Default

A. Final Efforts

Toward the end of the contract, KI sought additional funds from the

35

Invoice No. 13442 was submitted on February 1, 2005, Invoice No. 13493

was submitted on March 2, 2005, Invoice No. 13561 was submitted on April

11, 2005, and Invoice No. 13647 was submitted on May 12, 2005.

56

government and from private sources to ameliorate the project deficit caused

by the accumulation of several issues: the geotechnical work, the security and

mold mitigation issue, and retainage.

1. KI Petitions Ms. Lowther for Return of Retainage

KI formally petitioned Mr. Cate and Mr. Powell to return a portion of

the retained funds on February 18, 2005. On behalf of KI, Mr. Rand wrote,

Over the course of the past twelve months Kullman Industries

has been promised a reduction in the current high amount of

retainage held on the Dushanbe NEC project initially based

upon our ability to successfully transport the modules from our

Lebanon, NJ fabrication site to the Dushanbe NEC site. In fact,

we were promised a pro-rata reduction in the retainage based

upon successful monthly arrivals of the modules in Dushanbe.

Despite successfully delivering the modules to the site, the

retainage was never reduced. Subsequently, we were promised

a reduction in retainage based upon the completion and

submission of a ‘final’ Geotech report. Attached, please see a

copy of the final Geotech report.

I trust that we are now at a point where the retainage on this

project can be reduced to a more appropriate level given the fact

that Kullman Industries is approximately 87% complete with the

project, and to a level that more accurately reflects any

remaining risk that OBO deems required.

JX 826 at 1.

Ms. Lowther denied this request on March 4, stating that it was the

CO’s right under FAR 52.232-5 to retain up to 10% of the contract value when

the contractor had not made adequate or satisfactory progress. JX 863 at 1

(“The promises Kullman references that were made last year to reduce the

retainage were based on the successful transporting of the modules, significant

progress of work and development of an accurate completion schedule. To

date, Kullman has not demonstrated significant progress.”). Ms. Lowther did

not mention liquidated damages as a justification for withholding the

previously retained funds.

57

2. KI’s Attempt to Obtain Private Funding

In February of 2005, KI began an effort to borrow approximately

$2,000,000 from Tatonka Capital Corporation (“Tatonka”). By May 5, 2005,

KI and Tatonka had worked out the terms of a loan.

Carol Hansen, Tatonka’s Chief Executive Officer, contacted Ms.

Lowther “for confirmation of the Dushanbe numbers.” JX 1007 at 1. After

speaking to Ms. Lowther, Ms. Hansen called Mr. Kullman and informed him

that Tatonka could not go through with the loan. According to Mr. Kullman,

Ms. Hansen told him that “Lorri told her that my money was being held for

retainage, that there was mold litigation going on, I was never going to get

retainage, and, you know, things weren’t in too good shape.” Tr. 1823.

Following this telephone conversation, Mr. Kullman e-mailed Ms. Hansen

with a draft letter memorializing what she had told him about her conversation

with Ms. Lowther and asked her to sign and send the letter to KI if she agreed

with the content. Ms. Hansen agreed with the content and sent the letter on

May 13, 2005, which detailed her conversation with Ms. Lowther and formally

denied KI’s request for funding. Ms. Hansen wrote to Mr. Kullman, “While

Ms. Lowther confirmed the retainage amount you indicated, she stated that

Kullman was involved with mold litigation and that liquidated damages would

be assessed. While you made us aware of the geotech claim, these undisclosed

issues prevent us from moving forward.” JX 1007 at 1.

When asked at trial about her conversation with Ms. Hansen, Ms.

Lowther maintained her position that the government was assessing liquidated

damages but admitted that she knew there was no litigation involving the mold

mitigation.

After failing to secure private funding, KI wrote the following to Ms.

Lowther:

In an effort to keep the project moving despite excessive funds

being retained, Kullman sought financing. However, when a

representative of the financing institution contacted you

regarding the status of the project, you incorrectly stated that

there was mold litigation, and that you were withholding funds

due to that litigation. This misstatement caused the financing

institution to retract its offer of financing to Kullman. In

addition, the financing institution was advised that liquidated

damages were being assessed. We have no knowledge of any

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assessment of liquidated damages. Whether it was your

intention or not, you certainly damaged Kullman’s financial

resources, which may affect the completion of the project.

JX 1031 at 2 (KI’s response to the government’s cure notice).

3. KI Meets with DOS Officials in a Final Attempt to

Obtain Funding

After exhausting options for private funding, KI once again approached

the government in an attempt to convince it to release all or part of the money

that it had retained on the contract. Mr. Kullman testified that he contacted

General Williams, congressmen, senators, and even “Arlen Specter to go to

Connie Rice who was the head of the State Department.” Tr. 1522-23.

Eventually, Mr. Kullman got in touch with Mr. Prior, the Construction and

Commissioning Director at OBO within DOS. Mr. Prior set up a meeting that

occurred in May of 2005. Mr. Kullman recalled the following:

So then I speak to Mr. Prior, and he’s, you know, he speaks to

General Williams. And he says, General Williams is upset

about the whole thing and he’s upset how your finance company

was interfered with, and there is a recording of that conversation

. . . . And we had a meeting. And it was in a large conference

room filled with the Cates of the world and all the top people

were there.

And I told them, I can’t finish this job. I am going to go out of

business. I am going to go bankrupt. I can’t pay people. And

they sit there – and now all these people had never heard of the

Geotech Report. You’re telling me that the people in that room

didn’t know there was a Geotech Report? Okay. Anyway I

walked out of that room, and what they said was they were

either going to figure out how they could release some retainage,

how to maybe find out, do something on the geotech, do

something in all these different items to free up some money so

we could finish the job. So that’s the first time I ever saw a

meeting where everyone wanted to get together and finish this

job.

Tr. 1524-25. Despite KI’s persistent efforts to have the government address

one of the pending requests for equitable adjustments or to release some of the

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retained funds, it was unsuccessful.

B. The Cure Notice

Instead of responding to KI’s latest request for money, Ms. Lowther

sent a formal cure notice to KI on May 21, 2005. JX 1027 at 1 (noting that KI

and the government had met extensively during the previous week about the

“current situation”). In the letter, she reminded KI that the Dushanbe Project

was awarded as a sole-source contract because of the project’s urgent and

compelling nature. She wrote, “[n]othing has changed to lessen the urgency

of the completion of this project. . . . [T]ime is of the essence in the completion

of this project.” JX 1027 at 1. Then, Ms. Lowther listed the following reasons

that KI was failing to make adequate progress:

1. The Government understands that York International is

retaining necessary parts for air conditioning because of

lack of payment.

2. The Government understands that PDI has not returned

to the site. PDI’s work is on the critical path to

completing this project.

3. The Government understands that there is 60,000 lbs of

materials remaining at Baltimore Packing. This material

needs to be shipped to the site immediately.

4. The Government understands that there are 6 containers

in Riga awaiting trans [sic] shipment to Dushanbe.

JX 1027 at 1. Unless KI cured these conditions by June 17, 2005, “the

Government will be forced to consider termination for default under the terms

and conditions of the contract.” JX 1027 at 1. Although the contract

completion date of June 20, 2004, had not been changed as of the date of the

cure notice, Ms. Lowther indicated that the government expected substantial

completion of the Dushanbe Project by September 1, 2005.

KI responded on the following business day May 23, 2005, with a letter

addressing the issues raised in the cure notice. JX 1032. KI asserted that it

complied with the first condition and ordered the parts requested from York

International. Next, KI requested DOS’s assistance to secure PDI’s return to

the job site because PDI was currently occupied with another DOS project. KI

explained that the materials remaining in Baltimore were not delaying the

project even if they arrived after June 17, as scheduled. It indicated, however,

that it was willing to expedite the shipping if the government was willing to

60

pay for the increased air freight shipping costs. Regarding the final condition,

KI pointed out that the containers were delayed in Riga because of political

unrest, which was beyond KI’s control.

After explaining its position on the conditions to be cured, KI reasserted

its position on the release of funds being retained and the financial difficulties

of the project. Finally, KI expressed the following:

Although Kullman wants to complete the Dushanbe project, it

may be forced by the State Department’s actions, including its

material breaches of the contract, to reduce its forces to an

appropriate economic level. This step, if taken, is not take

lightly or without considerable forethought. It is somewhat

incongruous and disconcerting that when the project is nearly

complete, the State Department has acted in an arbitrary and

capricious manner, has breached its duty of cooperation and has

interfered with Kullman’s ability to prosecute the work to

completion, including impairment of its ability to obtain

financing.

JX 1031 at 2.

Ms. Lowther mailed and faxed a response to KI on May 24, 2005,

which noted KI’s failure to affirm that it would cure all conditions by the

stated deadlines. She also noted that KI had reduced its on-site workforce by

50% and that an “increase in manpower remains a condition of Cure.” JX

1035 at 3. Ms. Lowther reiterated that the project remained urgent and

compelling and that the government expected KI to cure and make adequate

progress to remain in compliance with the contract.

C. “Winding Down”

Following its response to the cure notice, KI began to reduce its

participation at the Dushanbe job site to what it considered an economically

feasible level. In fact, KI had been considering whether it should wind down

its participation at the Dushanbe project site for some time prior to the cure

notice.

KI’s internal discussions about whether to reduce the scope of work at

the Dushanbe Project began in March of 2005. See JX 860 (discussing plans

to increase the workforce with 15 additional cleared American workers, noting

61

that the lack of funding made paying current workers difficult, and concluding

that “[w]e may very well have reached the point where we need to pull back

the American staff and slow down the operation until OBO releases additional

funds”); Tr. 577-79 (Kosinski). Ms. Lowther recorded that “[b]eginning on

May 11, 2005, Kullman initiated a draw down in its workforce by cutting

approximately 50 percent of its cleared American workers on site.” JX 1035

at 3 (May 24, 2005 letter to KI regarding KI’s response to the cure notice).

On May 21, 2005, Mr. Kosinski discussed with Mr. Rand and Mr.

Lefkus the cost of travel “to fly everyone out of here if that’s where we end

up.” JX 1030 at 1 (suggesting also that five individuals remain in Dushanbe

“to wrap things up”). By the time that KI had responded to the cure notice,

Mr. Kosinski had prepared a spreadsheet of KI’s minimum monthly operating

costs that could be adjusted depending on “how far we want to scale back.”

JX 1033 at 1. Mr. Kosinski recommended leaving the “Case backhoe, the

Bobcat, . . . the small compactor” and the “Lull” on site so that KI could

“continue with at least some of the excavation and grading work even if we

decide to pull everything else out.” JX 1033 at 1. The plan to send a majority

of the workforce home continued to develop over the next few days. See JX

1038 (including a detailed travel plan), JX 1059 (stating the need to purchase

tickets so that the workforce could travel home between the twenty-second and

twenty-fifth of June).

Part of KI’s internal conversation about whether and to what extent the

company should diminish its forces in Dushanbe concerned an effort to predict

how the government would respond. Some KI decision-makers hoped that

reducing the workforce in Dushanbe would cause the agency to take seriously

KI’s claims regarding its dire financial situation and would lead it to grant one

of KI’s various requests for funding. Mr. Rand was not optimistic about the

outcome, however, and wrote the following to Mr. Lefkus: “As we get closer

to D-day with OBO I feel that everyone should be very clear of ‘the end

game’. I would not put it past OBO to terminate KI for default, and then to

hire a [general contractor] to complete.” JX 1064 at 1 (e-mail dated May 29,

2005). He warned Mr. Lefkus that “[w]e are thinking much to [sic] logically

and from a business sense to understand how the government works.” JX

1064 at 2.

In June, the Dushanbe project was nearing completion as KI worked on

the interior and exterior finishes of the buildings and prepared to lay the curbs

where the roads had been graded. Even as work continued, however, KI

further developed its plan for how to move most of its workforce out of

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Dushanbe. JX 1086 (June 7, 2005 e-mail with attachment “showing how

much additional funding is required to pay off all our local accounts as of June

15th”); JX 1090 (June 7, 2005 e-mail working out travel details). Mr.

Kosinski testified that while there was a possibility that KI could re-mobilize

the workforce if the government provided additional funding, the only people

who were scheduled to return to Dushanbe were himself, Fred Martinez, and

Joseph Allen.

Despite the fact that KI planned to leave the job site in June, it kept its

intentions concealed from subcontractors and from the government. JX 1090

at 1 (“At some point - BUT NOT YET!!!! - we will need to notify Atlantic

Group to make . . . arrangements for their (5) remaining guys who are also

scheduled to depart via Istanbul on the 22nd. Please take direction from Alan

on the appropriate time to contact the Atlantic Group - NOT YET!!!”); Tr. 596

(Kosinski) (“[I]t seems that we didn’t want to let Atlantic Group know what

we were planning to do at that point. . . . Maybe it was we didn’t want them to

pull their guys out or to get concerned that we were pulling off the project.

Maybe we didn’t want them to tip our hand to the government at that point.”).

One reason was that DOS had approved a $679,423.00 progress payment on

June 2, 2005, which KI was waiting to receive as of June 7, 2005. JX 1087 at

1 (“Mr. Kullman confidentially explained to us that he will be collecting a

fairly large receivable from the State Department. After receiving this

payment, he will begin pulling his people off the State Department job.”).

Between June 1 and June 18, KI maintained only minimal labor on site.

On June 13, 2005, Mr. Kosinski wrote to Christine Byrnes, Alan Rand’s

Administrative Assistant,36 that the local workers would be laid off the next

day. The June 13 travel plan listed departure dates for local workers and KI

employees between June 8 and June 25. KI began sending letters to its

subcontractors on June 14, 2005, asking them to cease work on the Dushanbe

project, remove any on-site workers or materials, and halt any plans to deploy

materials or personnel. KI included in these stop work orders a sentence

expressing that “[w]e are hoping to work out disputes with the US State

Department in order to remobilize the project. However, we do not know what

the outcome of these discussions will be.” JX 1114 at 1. Mr. Kullman

attempted to contact Ms. Lowther by phone and e-mail on June 14, 2005, to

“discuss the current situation on the project.” JX 1118 at 1. Nevertheless, Mr.

Kosinski meanwhile was destroying contract files as part of preparations to

leave the job site. As of June 20, 2005, KI had suspended all contractor and

36

Mr. Rand, Mr. Jordan, and Mr. Allen were copied on this e-mail.

63

subcontractor activities on site.

D. The End

On June 17, 2005, DOS terminated the contract for default. Ms.

Lowther wrote the following:

Based on our telephone conversation the afternoon of June 14,

2005 the Government understands that Kullman Industries is

demobilizing from the Dushanbe NEC project site effective

Monday June 13, 2005. The Government also understands that

Kullman has written to all of its subcontractors on the project

and informed them that they will not be paid and should leave

the project site. This information has been confirmed today by

the OBO representative at the site. The OBO representative at

site telephoned OBO Washington this morning to notify OBO

that your project manager has confirmed that all subcontractors

have been terminated and that all work on the project has

ceased. You are hereby notified that the Department of State

considers such unilateral action on the part of Kullman

Industries to be an intentional and inexcusable breach of

contract.

JX 1133 at 1, JX 1135 at 1.37 Ms. Lowther testified that after “looking at

37

In the CO’s June 17, 2005 Final Decision letter, she asserted that she had

“assessed liquidated damages as a result of Kullman’s failure to complete this

project on time” and that KI would “be liable for any damages to the

Government resulting from the Contractor’s refusal and failure to complete the

work within the specified time” including costs incurred to complete the work.

JX 1133 at 2, JX 1135 at 2. There is no evidence that Ms. Lowther actually

followed up with a formal assessment of liquidated damages or reprocurement

costs. She had previously stated in the May 24, 2005 letter, however, which

was in the series of communications regarding the cure notice, that the

government had notified KI in writing on June 18, 2004 that it was assessing

liquidated damages and that “[t]o date, Kullman has incurred $1,139,060.00

in [liquidated damages]. In addition, the June 18, 2004 letter explained that

any retainage released would be less the amount of accumulated [liquidated

damages].” JX 1035 at 3; Tr. 483 (Lowther). As Ms. Lowther pointed out, the

government was within its rights under the FAR to retain roughly 4% of the

(continued...)

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everything as a whole and with them basically leaving the job site and not

progressing on the contract, I felt like I had no other recourse than to terminate

them.” Tr. 450. When asked by the court if her decision might have been

different if she had considered KI’s assertion that its inability to pay

subcontractors was caused by the government’s failure to release previously

earned but retained funds, Ms. Lowther answered, “[a]t the time of the

Termination for Default? Without sounding cold, I would have to say [no]

because they were leaving the job site and that was primarily what I was

basing the determination on, was lack of progress with the work.” Tr. 481.

Thus, the CO’s ultimate justification for terminating KI was that it had

abandoned the job.

When work ceased, the Dushanbe Project was, according to the OBO

Project Director’s Monthly Progress Report, 91.29% complete. On June 6,

2005, Irving Fontaine, the on site Project Director recorded that KI had

recently completed the following activities:

[I]nstalled external window trims at NOB; completed floor tiles

at NOB dining; installed spandrel windows at NOB and MSGQ

stair towers; installed area heaters and overhead coiling doors at

warehouse; completed backfill at fuel diesel tanks; completed

wall insulation [ ] at MSGQ; completed two electrical

manholes; installed acoustic inclosure at water chillers;

completed utility shell, installed HVAC unit and duct work at

service CAC.

JX 82 at 1 (May OBO Project Director’s Monthly Progress Report). The

following activities were ongoing:

sealing between exterio[r] stone panels, removing mold damage

GWB and plywood in NOB; vacuum cleaning and wet wiping

throughout NOB building; installing GWB and plywood

throughout NOB north 2nd floor; plastering and painting walls

at NOB south 1st floor; installing HVAC ducts at NOB 4th

floor; installing studs for internal spaces at service CAC sally

port area; installing rebar for delta barrier at service CAC . . . .

37

(...continued)

contract, which in this case amounted to $2,169,521.50. FAR 52.232-5(e)

(2003).

65

JX 82 at 1.

There is other credible evidence, however, that the progress reports

were inaccurate, and that more than 9% of the work remained. Eric Rumpf,

who was OBO’s Branch Chief for the Europe and Eurasian Construction and

Commissioning Division, traveled to Dushanbe to assess the project status at

the end of June 2005, after KI’s termination. Mr. Rumpf testified that the

project was not nearly complete: there was still work left to be done on the

central utility building, which connected the other buildings with utilities,38

there was no landscaping, the roads and sidewalks were not complete, twenty

percent of the protective perimeter wall was not finished, the buildings were

still missing some exterior facade, there was still work left to be done in the

interiors of the buildings owing to the mold mediation measures, there was still

mold and water damage in the Marine Security Guard Quarters that required

a “major overhaul,” PDI’s work within the CAA had not concluded, and there

were a few windows that still needed to be installed. Tr. 81-100.

V. Bankruptcy

On October 17, 2005, KI filed for bankruptcy. Mr. Kullman recalled

that, “even when I did go bankrupt, every job that I was working on, those

clients all got their buildings. . . . The only client that didn’t get a completed

building was the State Department. And why? Because I was terminated.”

Tr. 1528. During the same time frame, DOS was seeking to debar KI.

The Trustee in Bankruptcy filed her complaint here on June 16, 2006.

The government counterclaimed on June 19, 2007.

DISCUSSION

Trying a default termination frequently takes on the character of a

juridical autopsy, an after-the-fact effort to determine what went wrong and

who was responsible. The autopsy we are called on to perform here is

particularly poignant, given that, at the end of the day, a successful, family

owned business no longer exists. We have no doubt that KI undertook the

contract to build the embassy in Dushanbe fully capable of completing it and

38

Although the internal utilities connections between buildings were not yet

finished, the only utility that was available on site at the time of termination

was water. The government had not yet fulfilled its obligation to provide

external sources of electricity and telecommunications.

66

fully intending to do so. We are also satisfied, however, that virtually all the

problems which arose and kept it from completing the work can be traced to

one mistake KI made early on and which continued to do mischief through the

following two years: KI’s misunderstanding of the effect of M002.

Ultimately it was KI’s self deception concerning what it had agreed to

do, and at what price, that launched contract performance onto a doomed

trajectory. As we will see below, KI bound itself to perform all the work,

including the geotechnical aspects, at a fixed price. Its willingness to hazard

the contract was prompted by an unwarranted assumption that it could ask for

more money if the geotechnical aspects of the foundation proved to be

difficult. That mistake was then compounded by its subsequent reliance on

erroneous advice about the difficulty of preparing the foundation, leading it to

spend, unnecessarily as it turned out, far more than it budgeted for

geotechnical work. The combination of those two mistakes, neither of which

can be shifted to the government, put KI over budget and behind schedule

virtually from the beginning and ultimately accounts for the default

termination.

The fact, for example, that what should have been the routine, bilateral

development of a schedule of values to trigger progress payments became

impossible to establish with accuracy. In order for KI to develop cash flow up

front, it became necessary for the parties to collude on a disingenuous

schedule, postponing the inevitable collision of that contrived schedule with

the reality of more remaining work than remaining money. That, in turn,

prompted KI’s inability to keep up with payments to its subcontractors. KI’s

misguided REA also triggered the government’s belief that KI was attempting

to perpetrate a fraud. Our evaluation must begin, therefore, with the contract

negotiations over price and the subsequent disagreement over who was

responsible to pay for the geotechnical work.

I. The Geotechnical Claim

Plaintiff’s geotechnical claim is difficult for the court to classify. On

occasions it appears to be a differing site condition claim for unusual soil

conditions. Occasionally it is presented as a straight contract claim. I.e., that

the parties agreed to also pay KI whatever it took to complete the foundation

work. It has been presented as a species of bad faith breach of contract claim

or an argument that the government is estopped from denying that it owes KI

more than the fixed price of the contract. In whatever form it is argued,

however, there can be only one outcome. The claim fails because a literal

67

reading of the contract plainly supports defendant’s contention that plaintiff

assumed the risk for how much the geotechnical and foundation work would

cost when it agreed to a fixed price. The facts set out above demonstrate that

the contract obligated KI to perform all the work, including the foundation, at

that price.

The parties did not, contrary to plaintiff’s argument, reserve for a later

day a full reckoning on the price for geotechnical work. It may well be the

case that Messrs. Lefkus, Rand and Kullman believed that they had negotiated

such a reservation, but it does not appear in writing. In fact, the written

evidence is that what KI representatives assumed was in effect an allowance

for geotechnical work was merely the agency’s recognition that, only if KI

could establish a differing site condition due to unusual soil condition would

the agency have to face additional cost. Even assuming Mr. Lefkus knew that

Mr. Sutherland had set aside up to $2,000,000 for a possible differing site

condition claim, he was wrong to leap to the conclusion that the agency would

not contest it.

Nor is there any suppo

This text is long and has been trimmed here. Open the source document for the complete record.