Hernandez, Kroone and Associates, Inc. v. United States

In the United States Court of Federal Claims

No. 07-165 C

(Filed March 29, 2013)

HERNANDEZ, KROONE AND )

ASSOCIATES, INC., ) Equitable Adjustment; Contract Disputes

Plaintiff, ) Act; Fraud Counterclaims; Special Plea in

) Fraud, 28 U.S.C. § 2514; False Claims Act,

v. ) 31 U.S.C. § 3729; CDA fraud provision, 42

) U.S.C. § 7103(c)(2).

THE UNITED STATES, )

Defendant. )

OPINION

Laurence P. Lubka, Pasadena, CA, for plaintiff. Richard Mah, of counsel.

Daniel Rabinowitz, Department of Justice, Washington, D.C., with whom were

Assistant Attorney General Tony West, Jeanne E. Davidson, Director, and Donald E.

Kinner, Assistant Director, for defendant.

Merow, Senior Judge.

This litigation stems from a 2005 contract between the United States Army

Corps of Engineers (COE) and Hernandez, Kroone & Associates, Inc. (HKA) for a

modular building, to be factory-constructed, delivered and installed, for use as a

Border Patrol Station by the United States Department of Homeland Security (DHS),

on a site in Indio, California. The contract required site preparation and construction

of an adjoining paved parking lot and perimeter security fencing.

Plaintiff, HKA, contends that it was required to perform work beyond the scope

of the contract, for which it seeks compensation, whereas defendant contends that all

work ordered was within the scope of the contract and further counters with a demand

that plaintiff’s claims be forfeited pursuant to 28 U.S.C. § 2514 and that monetary

damages or penalties be assessed against plaintiff pursuant to 41 U.S.C. § 7103

(Contract Disputes Act) and 31 U.S.C. § 3729 (False Claims Act).

FACTS

At some point in late 2004, DHS contacted the Fort Worth, Texas District COE

concerning initiating a procurement for a modular building to serve as a United States

Border Patrol (USBP) Station in Indio, California. Alain Bernier of the Fort Worth

District had prior modular building contract experience with General Modular

Corporation (GMC) of Fort Worth, Texas and contacted its president and chief

executive officer, John Bennett for assistance in preparing the scope of work and

specifications for the project the COE needed to initiate a contract action. (Transcript

(Tr.) 2006, 2076.) The COE forwarded to Mr. Bennett a basic program requirement

for a 48-foot by 60-foot (48' x 60') modular facility of four single-wide, 12-foot by

60-foot (12' x 60') units. (Tr. 2091; Joint Exhibit (JX) 342.) The COE’s program for

the building’s roof provided “(1) Requesting low pitched roof.… (2) Covering: Shall

be covered with 30 year, architectural shingles.” (JX 342.004.)

Mr. Bennett discussed the basic COE program he was furnished with Ken Vian,

the DHS Border Patrol representative assigned to the project, pointing out conflicts

he had identified in the program and items that it would not “be smart to be

executed.” (Tr. 2091.) One such item was the requested pitched roof with

architectural shingles. Mr. Bennett proposed instead a basically flat “EPDM”1/ roof.

(Tr. 2091-93.) As the building had to be delivered by highway from a factory to the

Indio site, and was designed so it could be dismantled and relocated thereafter, a

pitched roof would be too tall for shipment and would restrict mobility. (Tr. 2045.)

On December 8, 2004, GMC submitted a proposal for the Indio Border Patrol

project to Alain Bernier at the Fort Worth COE District. (JX 315.005, 338.) Included

were General Construction Specifications, Scope of Work, Building Floor Plan and

Site Plan. (Id.) The total project cost was $942,273.00 which included a $25,000.00

“allowance” for security cameras and monitoring system and $39,044.50 for a

complete civil engineering package from HKA. (JX 315.005.) The HKA civil

engineering package included $6,671.50 for “Security Camera & Lighting Plan.” (JX

208, 315.013.) GMC sought a proposal from HKA for the civil engineering work

because HKA had previously performed a boundary survey of the Indio site in

connection with its acquisition by the government. (Tr. 59-61, 2007.) GMC’s

1/

EPDM, Ethylene Propylene Diene Monomer, is a synthetic rubber. See

http://www.rtnroofing.com/articles/511.htm.

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proposal also provided that the modular building construction would be subcontracted

to Walden Structures in Riverside, California. (JX 315.009.) The attached Walden

quotation included a roof system described as “Black EPDM over ½" gyp sheathing.”

(JX 315.010.) The Walden quotation to GMC was based on the original guidance Mr.

Bennett received from the COE as edited by Mr. Bennett based upon his experience

and discussions with Mr. Vian. (Tr. 2083.)

The $942,273.00 GMC proposal included $45,505.00 for a “City of Indio water

impact fee” and $10,000.00 for an estimated waste water impact fee. (JX 338.002.)

On January 10, 2005, Mr. Bennett (GMC) sent a letter to Alain Bernier (COE)

reporting conversations with Ken Vian (DHS) to the effect that the government was

not required to pay sewer and water impact fees, so $55,505.00 was removed from

GMC’s proposal. (JX 339.) The cost of a conduit to run between the Indio project

and a Border Patrol facility nearby was added and the proposal was revised to

$875,768.00. (Id.)

Instead of proceeding further with GMC’s proposal, the COE informed Mr.

Bennett that it had been decided that the contract for the Indio Border Patrol project

would be awarded to an 8(a) contractor. (Tr. 2011.) Since February 1, 2002, the

Small Business Administration (SBA) and the Department of Defense (DOD)

partnered to identify civil construction requirements for 8(a) sole source contracting

and the Indio project was selected for such an award.2/ (JX 144.)

Mr. Bennett informed the COE that in the process of developing GMC’s

proposal he learned that HKA was in the SBA 8(a) program; accordingly, Mr.

Bennett proposed that HKA become the prime contractor for the Indio project and

that GMC would endeavor to serve as a subcontractor to HKA for the modular

building and site fencing portions. (Tr. 2012-14.) In other words, GMC and HKA

would somewhat switch positions for this procurement. At this time, HKA was a

small civil engineering/construction management business jointly owned by a couple,

Richard and Anne Hernandez, both holding engineering degrees. (Tr. 46-51, 619.)

While HKA had performed several federal engineering contracts, their major

customer was the California Department of Transportation (Caltrans). (Tr. 46-52.)

2/

The 8(a) program assists small businesses, owned and controlled by socially and

economically disadvantaged individuals, in obtaining federal contracts. See 15 U.S.C. § 637(a).

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Mr. Bennett contacted Mr. Hernandez, informed him of the COE’s intent to

award a sole source 8(a) contract and suggested that HKA submit an unsolicited

proposal to COE. (Tr. 63.) Mr. Bennett sent Mr. Hernandez copies of all the material

forming the basis for GMC’s $875,768.00 proposal to COE for the Indio project. (JX

305, 315, 342.) GMC also submitted a subcontract proposal to HKA to design,

construct, deliver and install a modular building and site fencing for the Indio project

for $371,250.00. (Tr. 2012-15; Defendant’s Exhibit (DX) 49.) Attached to the GMC

proposal was the Walden Structures’ specifications for the modular building,

including a roof comprised of “Black EPDM over ½" gyp sheathing.” (Id.) Also

attached to GMC’s proposal was a fencing quote from Alcorn Fence Company which

provided for 10' high chain link topped with barbed wire, the fence wire to be “non-

climb.” (Id.)

Upon receipt of the bid material from Mr. Bennett, Mr. Hernandez called his

construction manager, Roland Hill, stating that HKA now needed to prepare a

proposal for the whole Indio project and they commenced to verify the pricing

information that Mr. Bennett had provided. (Tr. 80.) HKA’s estimate for its proposal

to be submitted to COE used the $371,250.00 GMC bid for the modular building and

site fencing. (JX 347.) The remaining work on the project was estimated at

$504,518.00, including site lighting at $22,500.00 and security cameras at

$31,250.00. (Id.)

On January 25, 2005, Mr. Hernandez submitted HKA’s $875,768.00 proposal

for the Indio project to Alain Bernier at the Fort Worth District COE. (JX 324.) The

cover letter to “Mr. Bemier” [sic] stated:

Please find the attached General Construction Specifications, Scope of Work,

Building Floor Plan and Site Plan. The total project cost is has [sic] been revised to

$875,768.00. Below is a detailed list of items that are included in this proposal.

Included in the Proposal Price

1. Complete civil engineering package. See attached letter and $39,044.50

scope of work.

2. Security Cameras and monitoring systems (allowance) $25,000.00

3. Landscaping, including irrigation $5,000.00

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4. Site built trellis on the rear of the building $7,500.00

5. Phone, date [sic] lines and terminations (allowance) $5,500.00

6. Storm water detention pond grading (allowance) $5,000.00

7. Installation of 60' long 2" service conduit between the two $5,000.00

sites.

Per our previous understanding, the Unicor work stations, City of Indio water impact

and waste water impact fees, and bonding are excluded.

The floor plan of the building is based on the original proposal requirements prepared

by General Modular Corporation. This floor plan was modified to reflect the needs

of the end user. The modifications did not increase the cost or size of the building

but just simply reallocated space based on the end users[’] needs.

The site plan that was developed shows a storm water detention facility. This may

not be required. The site plan also shows paving covering the entire site. The

proposal however only includes 80,000 sqft of base and 50,000 sqft of asphalt. The

50,000 sqft is enough asphalt to cover the parking area but not the entire site. The

same is true for the additional 30,000 sqft of base. The cost of the base is only $0.60

per sqft[;] it appears that an additional 20,000 sqft of base would be sufficient to

cover the balance of the fenced area as well as extending from the edge of the asphalt

to extend under the fence.

Per General Modular’s meeting with the City of Indio, it is suggested that you

exempt yourself from the permit process. None of these fees unless stated in the

above paragraph are included.

We have also included specific information on the fencing specification this

specification should provide you the function that you require and not exceed the

budget.

(JX 324.)

HKA’s January 25, 2005 proposal enclosed the 3-page Walden Structures’

specifications for the modular building showing the roof as “Black EPDM over ½"

gyp sheathing,” together with the original COE’s basic program requirements

previously provided to Mr. Bennett, which for the roof, stated, “(1) Requesting low

pitched roof” and “Shall be covered with 30 year, architectural shingles.” (Id.) The

scope of the work portion of HKA’s January 25th proposal to COE provided that site

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fencing have “‘anti-climb’ fabric mesh that has no dimension greater than one inch.”

(Id.) The scope of security lighting work would be determined from site plans, but

at a minimum would include perimeter lighting, lighting at gates, and lighting in the

parking area. (Id.) The scope of work for the site called for six 30-foot light poles

with KIM lighting heads. (Id.) The security scope of work also included six ultra

sensitive, low light level cameras “to provide more superior site security.” (Id.)

On January 28, 2005, COE commenced the process to initiate the award of a

sole source 8(a) contract for the Indio Border Patrol Station to HKA. (JX 152, 162.)

COE prepared a solicitation of over 200 pages for the construction contract involved.

(JX 381.) On or about February 5, 2005, HKA downloaded the solicitation from the

COE website. (JX 359; Tr. 95-98.) HKA’s review of the solicitation led to a

conclusion that it substantially differed from the project on which their January 25,

2005 proposal was based. (Tr. 99-106, 623.) In particular, the solicitation, in clause

52.222-6, required that laborers and mechanics employed or working on the

construction site be paid at rates not less than those contained in an attached wage

determination by the Secretary of Labor. (JX 381.052.) HKA had not addressed

paying these Davis-Bacon Act, 40 U.S.C. § 3141 et seq., wage rates in its January 25,

2005 proposal. (Tr. 104-05.) The solicitation required the submission of a bid

guarantee and payment and performance bonds, items not addressed in HKA’s

January 25, 2005 proposal. (JX 381.071 (bid guarantee), 381.076 (performance/

payment); Tr. 632-33.) The solicitation required the submittal of various plans, such

as an environmental protection plan (JX 381.166), a quality control plan (JX

381.208), an accident prevention plan (JX 381.225), and an activity hazard analysis.

(Id.). These requirements were not addressed in HKA’s January 25, 2005 proposal.

(Tr. 623.)

The COE’s solicitation also modified the scope of work for the parking lot

adjoining the modular building as compared to the work scope on which HKA’s

January 25, 2005 proposal to COE was based. The January 25, 2005 proposal

contemplated “approx. 50,000 square feet plus” of asphalt whereas, the COE

solicitation required “approx. 15,000 square feet.” (JX 324.017, 381.032.) The

January 25, 2005 proposal included “[a]pproximately 6 ultra sensitive, low light level

cameras” and “6, 30' light poles … heads are to be KIM Lighting,” whereas the COE

solicitation scope of work did not mention cameras or light poles. (JX 324.016-.019,

381.032-.034.)

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For the modular building, the January 25, 2005 proposal included both the 3-

page Walden Structures’ specification, providing a flat “EPDM” roof and the original

COE guide in “(1) Requesting low pitched roof” whereas the COE solicitation

included only the original COE guide. (JX 324.006-.015, 381.035-.040.)

HKA commenced work to prepare a bid in response to the COE solicitation.

(Tr. 107.) Previously contacted people were re-contacted to check their reactions to

Davis-Bacon wage rates. (Id.) Mr. Bennett reported that GMC’s subcontract price

for the January 25, 2005 proposal was still valid to use for HKA’s bid responding to

COE’s solicitation. (Tr. 111.) GMC had included a 25% profit in its proposal. (Tr.

2115.) On February 15, 2005, HKA forwarded to the COE Fort Worth District its

offer (Form 1442) to “furnish all services, material, supplies, plant, labor, equipment,

and superintendence to construct the USBP Station, Indio, CA, in accordance with

the Scope of Work and Specification[s] attached to this solicitation and any resulting

contract.” (JX 363.) HKA’s offer was a lump sum of $875,468.00 (JX 363.004.)

After submitting its offer, HKA was contacted by COE concerning a need to add two

items to the Scope of Work. (Tr. 115-16.) The items were testing subgrade

compaction and asphalt and installation of a 60' x 2" service conduit between the

existing USBP facility and the new site. (JX 218.004.) HKA agreed to the addition

of these two items to the solicitation Scope of Work at no additional cost, the offer

remaining at $875,468.00. (Tr. 118.) COE Fort Worth District on March 16, 2005,

sent to HKA a revised Scope of Work for the Indio Project, dated March 11, 2005,

adding the two items. (JX 218.)

On February 15, 2005, Alain Bernier, the COE project manager, submitted a

Price Negotiation Memorandum to the Fort Worth COE Contracting Division

covering negotiations for the proposed Indio project. (JX 362.) The memorandum

purports to cover negotiations with HKA, but the negotiations cited were with Mr.

Bennett of GMC. The stated “proposed” price of $938,000.00 was never submitted

by HKA, but is close to the $942,273.00 proposal GMC submitted for the Indio

project on December 8, 2004. (JX 338.) The “negotiated” price of $875,768.00 is

the amount reached when GMC (Mr. Bennett) withdrew $55,505.00 from his

proposal, for sewer and water impact fees, after conversations with Ken Vian (DHS)

to the effect that the fees would not be assessed, and added the cost of a conduit

between Border Patrol facilities. (JX 339.) The $875,768.00 price is also the sum in

HKA’s unsolicited January 25, 2005 proposal, which did not involve negotiations

with COE. (JX 324; Tr. 93-94.) HKA’s offer in response to the COE’s subsequent

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solicitation for a sole source 8(a) contract was $875,468.00, not the $875,768.00

stated in the price negotiation memorandum. (JX 362-63.) In any event, the

recommendation in the Price Negotiation Memorandum that the contracting office

proceed with a $875,768.00 award to HKA was approved by LaVette C. Buford, the

contracting officer at the Fort Worth District COE, on March 11, 2005. (JX 362.002.)

By letter dated March 29, 2005, the contracting officer notified HKA that it had

been awarded the contract for the USBP Station, Indio, California as follows:

Your proposal dated 25 January 2005, in the amount of $875,768.00, Line

Item 0001 and the Scope of Work, drawings and specifications (11 pages) including

construction duration of 150 calendar days under Solicitation Number W9126G-05-

R-0018, USBP Station, Indio, California is accepted. Contract Number W9126G-05-

C-0010 and Defense Priorities and Allocations System letter are enclosed.

Within 10 days after receipt of this award letter, please execute two copies of

the performance and payment bonds (See Section 00500) and submit them to this

office along with proof of the minimum insurance you are required to procure and

maintain during the entire period of the contract as stated in Section 00800, Special

Contract Requirements, Required Insurance. It is also required that you maintain

during the entire period of the contract proof of the minimum required insurance of

your subcontractors.

You are encouraged to develop, prepare, and submit value engineering change

proposals. (See Section 0700, Contract Clauses, Value Engineering-Construction)[.]

This letter does not constitute a Notice to Proceed.

(JX 247.002.)

The cited proposal date and price relate to the HKA’s unsolicited January 25,

2005 proposal (JX 324), whereas the cited 11-page Scope of Work and Specifications

refers to the March 11, 2005 revised scope of work. (JX 218.) The Form 1442

contract, as executed on March 29, 2005, by LaVette C. Buford, contained the

$875,768.00 lump sum price. (JX 373.006.) On April 7, 2005, HKA executed

Performance and Payment Bonds covering the contract, for the penal sum of

$875,768.00. (JX 248.)

Following the award of the Indio Project Contract to HKA, the COE

commenced discussions as to which office would oversee the contract work. (JX 385,

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822-23.) On April 22, 2005, The Indio Border Patrol Station (BPS) Contract was

transferred from the Fort Worth District COE to the Los Angeles District COE with

contracting officer duties to be performed by Patricia Bonilla. (JX 252, 378, 386.)

Joseph Flynn was designated the Contracting Officer’s Representative (COR) for

administration of the contract. (JX 255.) Mr. Flynn served as COE Project Engineer

for the contract working out of the March Air Force Base COE Office. Mr. Flynn

reported to Daniel W. Moore, Administrative Contracting Officer (ACO), as his

supervisor. (Tr. 1630; JX 823.) Roger N. Berg served as COE Office Engineer and

Alternate Chief Construction Representative on the Indio project. (JX 393.008; Tr.

1405-06.) Larry R. Romero served as COE Inspector. (Tr. 1768-69.)

As an initial step in contract performance, Larry Romero scheduled a Pre-

Construction Meeting (conference) for April 26, 2005, at the COE March Air Force

Base office. (JX 253, 387.) Attending were: Richard Hernandez, Anne Hernandez

and Roland Hill for HKA; John L. Bennett for GMC; Joseph Flynn and Larry Romero

for COE; and Ken Vian, Michael Singh, and Ralph D. Boubel for the Border Patrol.

(JX 395.) The conference turned out to be somewhat disorganized. John Bennett and

the Border Patrol personnel at one corner of the conference table discussed

modifications to modular building plans Mr. Bennett had brought. (Tr. 145-46, 647.)

Anne Hernandez and Larry Romero had discussions concerning a 39-page pre-

construction conference summary he wanted her to sign but as it contained errors,

such as an 1899 notice to proceed date, she refused. (JX 393.04; Tr. 144, 648-49.)

Richard Hernandez, Roland Hill and Joseph Flynn’s discussions concerned HKA’s

role as an 8(a) contractor and future relations with COE during contract performance.

(Tr. 146-47, 647.) Joseph Flynn directed Larry Romero to send a CD of lengthy

Performance Oriented Construction Activity Specifications (POCA) to HKA which

he asserted were applicable to this project. (Tr. 247.) However, POCA specifications

are applicable to only certain types of COE contracts, which did not include HKA’s

contract for the Indio Border Patrol Station, a point Flynn eventually conceded

somewhat later in HKA’s contract performance. (JX 322.002, 595.006; Plaintiff’s

Exhibit (PX) 10022.002; Tr. 676, 1199-1200.)

On May 6, 2005, the COE issued HKA a Notice to Proceed with the contract

work, which, given the contractual 150 calendar days performance time, established

a contract completion date of October 3, 2005. (JX 396.) At a meeting held with

COE and Border Patrol officials on May 18, 2005, HKA personnel were informed,

among other items, that HKA was responsible for the payment of developer water and

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sewer impact fees to local authorities and that 3/4" aggregate was required for the

asphalt paving on the project. (JX 16, 274, 595.003; Tr. 651-52.) On May 19, 2005,

Larry Romero (COE) sent to Ken Vian (Border Patrol), for approval of the changes

and the proposed $14,261.71 cost, a Walden Structures’ change order proposal listing

twenty-nine modifications to the modular building plans. (JX 406.) On June 4, 2005,

HKA signed a Subcontract Agreement with GMC to perform the work specifically

set forth in the Agreement, the Scope of Work and “Exhibit A” attached to the

Agreement, for the sum of $371,250.00. (JX 413.) According to the January 25,

2005 proposal submitted to HKA by GMC, the $371,250.00 comprised: $223,750.00

to design and construct the modular office building; $5,000.00 for the delivery of the

building to the site; $20,000.00 for design and installation of the building and

foundation; $112,500.00 for fence and gates; and $10,000.00 for travel and project

management. (JX 413.010.) “Exhibit A” consisted of the Walden Structures’

specification which provided for a “Black EPDM over ½" gyp sheathing” flat roof.

(JX 413.013.) The original COE program specification for a low pitched shingled

roof, included in the COE’s February 5, 2005 solicitation, was not included in the

HKA-GMC Subcontract Agreement. (JX 413.)

After a meeting was held on June 7, 2005, at the COE’s March Air Force Base

Office, where the specifics of the project were discussed, Anne Hernandez sent a

proposed contract change order to Larry Romero and Joe Flynn. (JX 276, 282.) The

proposal was suggested “to clean up discrepancies between HKA’s cost proposal, the

RFP solicitation, and the contract” for a total increase in the contract price of

$21,756.71. (JX 276.) The $21,756.71 proposal included $14,261.71 for the twenty-

nine modifications to the modular building plans identified as “Border Patrol’s

Request.” (JX 276.002.) The amount of asphalt for paving needed was increased

from 15,000 to 50,000 square feet at no proposed increase in cost. (Id.) The quantity

of Class II base was decreased from 80,000 to 61,600 square feet for a proposed

deduction of $11,040.00. (Id.) Lowering the chain link fence around the site from 10

to 8 feet produced a deduction of $11,830.00 and adding an additional 4-5 strands of

barbed wire was proposed at a cost of $4,200.00. (Id.) The additional sum of

$26,165.00 was proposed to cover the cost of performance and payment bonds for

HKA and GMC. (Id.) Finally several no-cost items were added, including:

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Item Description Costs

Number

9 Contractor is not obligated to pay assessment fees, connection fees, 0.00

or plan check fees associated with the project. If fees are incurred

by the City of Indio, the Army Corp will cover such fees.

11 The contract should state that there is an allowance of four security 0.00

camera [sic] and monitoring system (allowance $25,000)

14 Contract should state one phone & data line (allowance $5,500) 0.00

(JX 276.002.)

The COE Price Negotiation Memorandum for this June 7, 2005 HKA Proposed

Change Order, signed by Roger Berg, indicated agreement with the amounts added

and deducted, with the exception of the bond and additional asphalt sums which were,

essentially reversed. (JX 282.) The memorandum stated that in the original Fort

Worth COE negotiations, while 50,000 square feet were needed for the site, the

reduction to 15,000 square feet was made “to provide funding to compensate the

contractor for his bonding costs which were not in the original proposal, since this

was initially going to be done as a service contract.” (JX 282.002.) Accordingly, a

note to the memorandum explains:

Note 1: The negotiated price for the additional asphalt was changed from $00.00 to

$26,165.00 which represented the total cost to the contractor for the bonds that were

obtained for this project. The contractor has already obtained bonding therefore the

cost for putting this work back into the contract is based upon a reasonable cost

which approximately $17.20 per CY [cubic yard] which is a fair cost for the

additional asphalt. The negotiated cost for the bonding was reduced to $00.00 to

account for the fact that the contractor already has their bonds.

(Id.)

In connection with HKA’s proposal that the contract reflect that the contractor

is not responsible for the sewer and water fees required by the City of Indio, on June

15, 2005, Joseph Flynn sent HKA a letter stating that under the Contract Clause

52.236-7 (Permits and Responsibilities) “you are responsible for paying any

sewer/water impact fees required to obtain water service for this project.” (JX 277.)

Anne Hernandez (HKA) responded on June 27, 2005, by submitting a certified claim

to the contracting officer, Patricia Bonilla, pursuant to Contract Clause 52.233-1

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(Disputes), concerning the payment of sewer/water impact fees. (JX 430.) HKA’s

dispute included the following text:

2) On December 8, 2004, Mr. John Bennett of General Modular

submitted a proposal to Mr. Alain Bernier of the U. S. Army Corps

of Engineers, 819 Taylor Street, Fort Worth, TX 76102. This

proposal identified General Modular as the prime contractor with

Hernandez, Kroone & Associates as the subconsultant. The total cost

of this proposal was $942,273.00. This proposal clearly showed an

allowance for obtaining water and sewer service from the City of

Indio and the anticipated City’s fees of $55,505.00. The water and

sewer fees were shown as an allowance because the true dollar

amount was unknown. Between December 8, 2004 and January 10,

2005 two things changed. General Modular was informed that the

Army Corps could not sole source a contract to them and the

contracting arrangements changed where Hernandez, Kroone &

Associates became the prime contractor with General Modular as the

subconsultant. Hernandez, Kroone & Associates, as an 8(a) firm,

could receive a sole source contract. Secondly, the Army Corps

requested that we remove from our scope of work the water and

sewer fee allowances since per a conversation with Ken Vian that

these fees were not required. Please see the attached letter to Mr.

Alain Bernier dated January 10, 2005.

On January 25, 2005, Hernandez, Kroone & Associates submitted a

proposal as a Prime Contractor reflecting the requested revisions on

the water and sewer fee allowances. Hernandez, Kroone &

Associates[’] proposal totaled $875,768.00. This reduction is

identified in Hernandez, Kroone & Associates[’] proposal paragraph

3 which states that the “ … Unicor work stations, City of Indio water

impact and waster [sic] water impact fees, and bonds are excluded”.

In the contract negotiations, the Army Corps had the responsibility to negotiate in

good faith. The General Modular original proposal included allowances for the water

and sewer fees. Whether it’s a change in interpretation, need or other reason, when

the Army Corps asked for items to be removed from the cost proposal, the Army

Corps had the responsibility to remove these items from the contract. To leave these

items in the contract, either through written text or interpretation but fail to recognize

their cost impacts is not operating in a good faith. It is our opinion that the water and

sewer fees are the responsibility of the owner, Indio Border Patrol.

(JX0430.006-.007.)

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On July 6, 2005, the COE executed bilateral contract Modification No. R00001

which increased the contract price $21,756.71 and added sixty days to the contract

completion date. (JX 280.) The modification included the twenty-nine changes to

the modular building set forth in the June 7, 2005 HKA-Walden Structures’ Proposal.

(JX 280.002.) Also included was the fence change from 10-foot to 8-foot with 4

strands of barbed wire, the asphalt change from 15,000 to 50,000 square feet, and the

class II base change from 80,000 to 61,600 square feet. (Id.)

HKA began submitting the preconstruction plans required by the contract on

July 20, 2005, commencing with its Accident Prevention Plan. (JX 127, 444.) This

was followed by HKA’s submittal of its Quality Control Plan (JX 0003, 449), and its

Activity Hazard Analysis (AHA). (JX 0004, 450.)

HKA’s Accident Prevention Plan commences with the following Project

Description and Phases of Work:

Project Name: U.S. Border Patrol Station, Indio, CA

Project Description: Install pre-constructed modular building (2,880 sq. ft.), grade

lot and construct 80,000 sq. ft. of Class 2 aggregate base with 50,000 sq. ft. of asphalt

paving. Miscellaneous features include security lighting, security fencing and video

cameras, utility connections, patio with cover, and 400 sq. ft. of landscaping.

Contractor Accident Experience: 100% accident free to date.

Phases of Work: The work areas requiring AHA plan are as follows:

1. Grading

2. Paving

3. Installation of modular building

4. Erection of light poles

5. Handling of barb wire

6. Utility connections

(JX 127.004.)

The Quality Control Plan submitted by HKA listed the following definable

features of work:

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The Contract Quality Control Program outlined in this plan will include a complete

listing of definable features of work. The CQCM’s inspection of these work features

will be accomplished through implementation of the 3-phase control procedure

outline hereinafter.

Definable Features of Work

Clearing & Grubbing

Excavation, backfill and compaction

Foundation

Concrete flatwork

Asphalt paving

Lighting

Fencing

Utilities

Drainage

Delivery and Installation of Modular Building

(JX 0003.006.)

The Activity Hazard Analysis submitted by HKA includes a section on

“Lighting,” including “Erection of Light Standards.” (JX 0004.006.)

On July 20, 2005, HKA also submitted its Schedule of Values for approval.

(JX 128.) This schedule lists the contract elements included in the contract price,

with the dollar amount for each element, and was used to establish a basis for

progress payments. (Tr. 497; JX 128.)

The schedule submitted is as follows:

Contract No. - W9126G-05-C-0010

Contractor - Hernandez, Kroone & Associates, Inc.

Schedule of Values TOTAL

CONTRACT

Design - Surveying/Civil/Electrical $49,175.50

General Conditions & Mobilization $10,500.00

Management & Administration $9,676.00

HKA Bond $17,515.00

General Modular Bond $8,650.00

-14-

Modular Units at Factory $276,250.00

Delivery of Modular $7,500.00

Installation of Modular $25,000.00

Preliminary Grading $21,250.00

Electrical IID (Offsite) $19,758.21

Sewer & W ater Line Installation $12,500.00

Conduit - Phone/Data $19,500.00

Final Grading & Paving $190,000.00

Security Cameras $25,000.00

Management Construction $18,500.00

Site Lighting $27,000.00

Site Electrical (On-Site) $18,750.00

Landscaping $7,000.00

Fencing & Gates $134,000.00

$897,524.71

(JX 128.003.)

On July 25, 2005, Riverside Engineering Group submitted its proposal to HKA

to provide “[e]lectrical design for installation of new client provided modular office

bldg,” which, among other items, included “[p]arking lot lighting plan, pole base

detail and point x point lighting calculations.” (JX 18.) Also included in the proposal

were, “[s]tub-out provisions for security system” and “[s]tub-out provisions for future

extension of IID [Imperial Irrigation District] service at street.” (Id.) The proposal

was accepted by HKA and a subcontract with Riverside was executed on or about

August 1, 2005. (JX 36.)

HKA’s first invoice for a progress payment of $317,033.20 by COE, on the

Indio Project, was prepared on August 2, 2005, and covered “Design and

manufacturing of modular buildings, site survey, design of civil plans, and

preparatory documents required to begin site construction.” (JX 458.004 (emphasis

in original).) The Schedule of Values listed above was included as a part of the

invoice. (JX 458.005.)

-15-

On August 11, 2005, GMC and HKA amended their subcontract, increasing the

price by $15,281.71 to reflect the applicable modifications contained in the July 6,

2005 Modification No. R00001 (JX 280), to the COE-HKA contract. (JX 413.016,

803.179.)

HKA’s August Progress Report was submitted to COE (Larry Romero) on

August 26, 2005. (JX 465.) The report included the information: “Electrical Design

will complete 8/30/05. This includes Imperial Irrigation District’s requirements and

site lighting parameters, costs and availability.” (Id.)

On September 7, 2005, Riverside provided HKA (Roland Hill) with a sketch

of the lighting layout questioning whether another light should be added. (JX 41.)

HKA (Roland Hill) submitted a construction schedule to COE (Larry Romero)

on September 9, 2005, which covered installation of lights and security cameras. (JX

471.) The schedule provided that from 9-29 to 9-30-2005, site layout would include

“Light standards locations.” (JX. 471.003. ) From 10-3 to 10-7-2005, light standards

bases would be poured and from 11-2 to 11-4-2005 lights and poles would be erected

and security cameras installed. (Id.)

On October 3, 2005, COE and HKA executed bilateral contract Modification

No. R00002 increasing the contract amount $18,973.90 to compensate HKA for the

water capital improvement fees it had to pay to the City of Indio for water service.

(JX 302, 490.) This modification resulted from HKA’s June 27, 2005 claim (JX 430),

submitted to the contracting officer, objecting to any requirement that HKA pay this

fee, which prompted COE to obtain funds for the fee from the Border Patrol to cover

the expense. (JX 498.)

HKA submitted its invoice to obtain payment of the $18,973.90 on October 4,

2005. (JX 307.) Unlike prior submissions, such as that for its initial progress

payment, HKA’s $18,973.90 invoice did not include the Schedule of Values it had

submitted for COE approval on July 20, 2005. (JX 128, 307.) Rather, HKA deleted

the elements “Security Cameras,” “Site Lighting,” “Site Electrical (On Site)” and

added the element of “Water Meter (contract modification).” (Id.) HKA was

subsequently informed that the Schedule of Values could not be modified without

COE concurrence. (JX 331.)

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On October 8, 2005, HKA (Anne Hernandez) e-mailed COE (Joseph Flynn)

concerning the contractual scope of work (SOW). (JX 309, 511.) HKA asserts its

January 25, 2005 proposal is not included in the contract as follows:

Dear Joe,

Because the SOW has changed so much during the contract negotiation and the final

contract, the SOW items were not always clear and mutually understood as

demonstrated at our first meeting. In an attempt to correct previous deficiencies by

HKA, we have thoroughly reviewed the contract in order to bring ourselves into

better compliance with your expectations.

It is our understanding that the signed contract is standard form 1442; NSN 7540-01-

155-3212. Therefore the contract states the following:

• Line Item 10 “Contractor shall furnish all services, etc.…”

• Line Item 21 states that “… Line item 001 and the 11 pages of SOW

dated 11 March 2005 is incorporated into the contract …”.

• Line item 21 does not include HKA’s proposal and therefore is not

included in the contract.

I have included the 11 page SOW in a PDF image so you can see the documents that

I am using for the contract. Because Line item 21 specifically references the 11

March 2005 SOW, we are taking the position that this SOW replaces the SOW in

Line item 001 (solicitation).

(Id.)

Among the elements HKA lists as “excluded from the 11 page SOW” are

“Lighting,” “Security cameras,” “[parking lot] Striping,” and “Sewer impact fees.”

(Id.)

By a letter dated October 18, 2005, HKA (Anne Hernandez) writes COE

concerning her October 8, 2005 e-mail as follows (in part):

Dear Mr. Flynn:

With this letter I am documenting my October 8, 2005 email to you requesting

clarification of the contract scope. To date, I haven’t received a response and this is

-17-

impacting my construction schedule. Therefore, I need to proceed with the contract

scope as outlined in my e-mail.

My understanding of the contract scope is as follows:

1. My proposal is the two page letter sent to the Army Corps dated

January 25, 2005.

The statement of work attached to our proposal reflects a statement

of work that John Bennett of General Modular Corporation provided

to HKA from the previous solicitation. On February 4, 2005, the

Army Corps sent via e-mail to HKA a revised solicitation for an 8(a)

sole source contract. This solicitation contained a different statement

of work.

2. Between January 25, 2005 and the contract signing date, HKA and

the Army Corps negotiated the contract via phone. The contract

documents line item 2 is checked “Negotiated” (RFP).

3. The statement of work per the contract is the March 11, 2005

statement of work.

In summary, our contract per our interpretation, is our two page proposal, the March

11, 2005 statement of work, and the 8(a) solicitation documents containing all the

rest of the contract clauses.

(JX 316.)

Among the elements HKA proposed to delete from plans it previously provided

are, “Lighting,” “Striping,” “Sewer impact fees.” (Id.) As for “security cameras,”

HKA stated:

1. The security cameras are provided for in our proposal. What type of

cameras, where should they be mounted, what kind of posts are

desired, etc? We need input from the Army Corps so we can order

this equipment and design the installation.

(Id.)

The scope of work issue was substantially aggravated when, by letter dated

October 20, 2005, COE (Joseph Flynn) notified HKA that the modular building

constructed by Walden Structures did not conform to the contract specifications in

-18-

that, among other items, it lacked a pitched roof and the specified exterior siding. (JX

525.) For HKA this raised the possibility of having to salvage the existing modular

building and begin anew. (JX 326.001, Tr. 763.)

During this period, the COE’s office engineer, Roger Berg, on his own

initiative, contacted the IID questioning the IID requirement for a redundant power

line on the site to assist in future development, which visit caused complications for

HKA in gaining needed IID inspections. (JX 320; Tr. 692-93, 1447.) Roger Berg

also contacted the Regional Water Control Board providing incorrect information that

HKA was operating without a required permit. (JX 316-17, 320; Tr. 688, 1441.)

HKA’s complaints to COE concerning Roger Berg’s actions in contacting state

agencies were not addressed. (JX 841; Tr. 725, 1145.) After Roger Berg’s

intervention, the IID firmly decided that the requested redundant power line would

be installed or there would be no power service provided to the Border Patrol site.

(JX 136.028, 535; Tr. 688-93.)

On October 21, 2005, HKA (Anne Hernandez) addressed a letter to COE

(Joseph Flynn) asserting, in part, that “I signed a contract on February 15, 2005. This

contract did not include the statement of work from the January 25, 2005 proposal nor

from the March 11, 2005 statement of work.” (JX 322.) The letter also asserted that

with respect to on-site lighting and security cameras from their January 25, 2005

proposal that were included in the Schedule of Values for the first invoice HKA

submitted to COE, “We were required to show these items on the schedule of values

in order to get paid.” (Id.)

Anne Hernandez e-mailed Patricia Bonilla on October 24, 2005, as follows (in

part):

Hi Pat,

I called SBA. They advised that I stop all work on the project until I get contract

clarification. If I stop all work and then restart, I won’t be able to meet the December

1, 2005 completion date. The area that I am requesting clarification on is the

statement of work, drawings and specifications that are included in the contract, if

any. So with this email, I am requesting for you to clarify the contract requirements.

The main issue is the March 11, 2005 specifications for the modular building. If the

March 11, 2005 specifications are part of my contract, then my subcontractor may

need to default. The March 11, 2005 specifications has [sic] specific requirements

-19-

on the modular building which doesn’t match the meetings we had with the Ken Vian

(end user) and the resulting set of plans that were developed through those meetings.

The room sizes on the schematic drawing do not match the room sizes that were

developed from design meetings with Ken Vian. We did not request a contract

modification during these design meetings for each and every item against the March

11, specifications because we didn’t know that the Army Corp was taking the

position that this was part of our contract scope. Also, the March 11, 2005

specifications have several errors such as requiring asphalt shingles on a low pitch

roof. You need to pick either the low pitch roof or the asphalt shingles but they don’t

go together. Another error in these specifications state that restrooms will be “as

shown”; however, the schematic drawing doesn’t show any restrooms. If we

reconstruct the modular buildings to meet the March 11, 2005 specifications, the real

loser is the Border Patrol.

(JX 537.)

On October 27, 2005, Anne Hernandez sent a facsimile transmission to Patricia

Bonilla detailing “the impacts of the March 11 specifications.” (JX 131.) The impacts

detailed involved the modular building. (Id.) The transmission further stated (in

part):

My concern and it is a very real concern is that Daniel Moore and Joe Flynn will

piece meal to me deficiencies that need to be address[ed] from now to the end of the

job so I can’t possibly complete meet [sic] a satisfactory completed product and on

time date.

We do not have a good relationship and I am strongly concern[ed] about malice on

their end.

(Id.)

On October 25, 2005, HKA (Richard Hernandez) addressed a six-page letter

with attachments to the local California office of the congressman representing the

41st District. The letter stated (in part):

With this letter, I am requesting a meeting as soon as possible with the Army Corps

of Engineers. The meeting should include the contracting officer Ms. Patricia

Bonilla, a representative from the Small Business Administration, and Mr. Ken Vian

of the U.S. Border Patrol. If “chain of command procedures” are required, additional

personnel from the Army Corps should be invited. I will leave the identification of

other personnel to your discretion.

-20-

It is very important that this meeting is held as soon as possible and include parties

who have authority to issue contract interpretation and direction. My goal is to get

a resolution as to whether or not the March 11, 2005 specifications which were added

after I signed the contract are a legally binding part of the contract.…

The modular building design was developed from meetings with Mr. Ken Vian of the

U.S. Border Patrol and the Army Corps. These meetings took place at the Army

Corps March Field office during and after the April 26, 2005 kick off meeting with

all parties present. During these meetings, the Army Corps never informed my team

that the March 11, 2005 specifications were a part of my contract and that the design

direction being provided by Ken Vian was in conflict with those specifications.…

On October 11, 2005, my construction representative attended a meeting with Mr.

Ken Vian. Ken Vian wanted to know how much it would cost for HKA to provide

additional work. My representative collected the list of additional items desired by

Ken Vian and I submitted a proposal with a copy to the Army Corps. The Army

Corps, Mr. Joseph Flynn and Mr. Roger Berg, were extremely angry that I submitted

an unsolicited proposal and informed me that I was never to do that again.

Furthermore, they called me “a crook” and told me to do only the contract scope and

nothing but the contract.…

From October 18 to October 24, I had discussions with others, SBA and performed

more investigation on my own. October 24, 2005, Anne Hernandez issued a revised

letter to Joe Flynn, Patricia Bonilla and Daniel Moore stating that my contract is the

February 15, 2005 contract that she signed and that the March 11, 2005 specifications

that were added after her signature are invalid. Since issuing this letter, the Army

Corps has been adding additional tasks that they say are a part of this contract on

almost a daily basis as a penalty. This new contract interpretation is being issued by

Daniel Moore, Joe Flynn and Larry Romero. The new contract interpretation

includes offsite utilities, developer impact fees, correction to a City of Indio’s street

drainage system that was not working before this construction project, and a

restoration plan. These items are clearly not in my scope and an interpretation is not

necessary on these issues. (The real issue is how can any contractor continue perform

[sic] and expect to receive payment for costs incurred with such blatant disregard for

contracting law and abuse of power.)…

It appears that the goal is to penalize my contract team as much as possible without

regard to the quality of service being delivered to the U.S. Border Patrol. The

modular product as sitting the [sic] on the factory floor contains restrooms, an IT

room, and a janitor’s closet. It also contains the intent of what the U.S. Border Patrol

wanted delivered.

(JX 330.)

-21-

The COE commenced internal discussions to organize a response to the

congressional inquiries which resulted from HKA’s request for assistance and to

schedule a meeting with HKA to discuss the applicable contractual scope of work.

(JX 560, 564, 566, 572, 578-79, 846-48, 850-51; Tr. 1124.) On October 27, 2005, the

COE (Joseph Flynn) notified HKA that several deficiencies existed including, “The

modular units do not conform to the contract requirements.” (JX 136.041.) Flynn

informed Richard Hernandez that the contract required a shingled gable roof and T1-

11 siding and a number of instances existed where the modular building did not meet

specifications. (Tr. 177.) John Bennett (GMC) responded to the assertion of modular

deficiencies by a letter, dated November 3, 2005, to Anne Hernandez with a “cc” to

COE (Joseph Flynn) pointing out that the modular building was constructed using

“7/17 LP Smart Panel in lieu of T1-11 … [which was] dramatically superior in terms

of performance, maintenance.” (JX 139.003.) Mr. Bennett also explained the

installation of a single ply EPDM roof which “exceeds the performance of the

[s]hingle roof.” (JX 139.004.) Also a shingle roof modular building would be too

tall to transport to the site. (Id.) On November 8, 2005, the Border Patrol (Ken Vian)

informed the COE (Alain Bernier) that the modular building was accepted as built.

(JX 576.) Alain Bernier, in turn, transmitted an e-mail to a number of COE

personnel, including Daniel Moore, Patricia Bonilla, and Joseph Flynn, stating “Dan,

as per the message below, our customer is accepting the modular unit as constructed

and should no longer be an issue.” (Id.) However, the COE did not formally notify

HKA that the modular building was acceptable as built until the final inspection for

the project, which occurred somewhat later. (Tr. 1170-71, 1175, 1188, 1521.) Joseph

Flynn testified as to his belief that HKA was aware of the modular building

acceptance situation but could not recall any specific notification to HKA. (Tr. 1725-

27.)

A meeting between HKA and COE was scheduled for November 9, 2005 at the

COE’s March Air Force Base Office. (Tr. 187, 718-722, 1715-16.) Attending were:

Anne and Richard Hernandez, together with Roland Hill for HKA; and Daniel Moore,

Patricia Bonilla and Joseph Flynn for COE. (JX 142.) The purpose of the meeting

was to attempt to resolve the scope of work issues which HKA had raised and then

sought congressional and SBA assistance to resolve these issues to their satisfaction.

(JX 143, 330, 537.) The meeting lasted some four hours and concluded with what the

COE considered an agreement that to the extent there were conflicts in the

specifications for the modular building, the three-page Walden specifications would

take “precedence.” (JX 143.002.) Also, the COE considered that agreement was

-22-

reached that the contract scope included the provision of six light poles, six lights and

six security cameras by HKA. (Id.) The COE further considered that agreement had

been reached that the COE would assume the cost of the redundant circuit that the IID

was insisting be installed as a condition for providing power to the Indio Border

Patrol site. (Tr. 1718.) A proposed bilateral contract modification setting forth the

agreement COE considered was reached was sent to HKA, but it did not include any

provision with respect to the IID redundant circuit. (JX 581; Tr. 1730-31.) Upon

review, HKA notified the COE that they did not agree with items 1 and 2 in the

proposed modification and would not sign it. (JX 147, 583, 585.) The Modification

No. R00003, dated November 14, 2005, was then issued on a unilateral basis as

follows (in relevant part):

A. SCOPE OF WORK

SM004 Clarifications to Scope of Work

As agreed in the meeting of 9 November 2005 at the March Project Office,

the following clarification is made to the scope of work.

1. The scope of work for the project is the Jan 25th 2005, 21 page proposal

from Hernandez Kroone that was sent to Alain Bernier of the Forth Worth

District.

2. If there is a conflict between the (7) seven page modular specification

and the (3) three page Walden specification, the Walden specification takes

precedence.

3. It further clarified that the following (4) four points noted in the price

negotiation memorandum are part of the scope of work, which are as

follows

a. Permits are not required.

b. Traffic control during construction when needed will be provided by the

Border Patrol.

c. The contractor will provide testing of the subgrade and the asphalt.

d. The contractor shall install a new 60' x 2" service conduit between the

existing Border Patrol station and the new site.

B. CHANGE IN CONTRACT PRICE

Total contract price is unchanged.

C. CHANGE IN CONTRACT TIME

The contract completion date shall remain unchanged by this modification.

-23-

D. CLOSING STATEMENT

It is understood that pursuant to the above, the contract time is not extended

and the contract amount is unchanged by this Modification, which reflects

all credits due the Government and debits due the Contractor, and reflects

the Government’s fair and reasonable estimate. It is further understood that

this Modification is being issued on a unilateral basis due to the

contractor’s refusal to sign the modification even though full agreement

was reached during negotiations. The contractor has now reneged on that

agreement and alleges that no agreement was ever reached.

(JX 581.)

By a letter to HKA, dated November 16, 2005, COE (Daniel Moore) clarified

that Modifications R00001 and R00002 “remain in effect and are not changed by the

unilateral clarification modification.” (JX 153.)

On November 21, 2005, Patricia Bonilla, contracting officer, and Daniel

Carrasco, a COE contracting supervisor, participated in a meeting with Anne and

Richard Hernandez together with officials from SBA to discuss the result of the

November 9, 2005 meeting and items requested by HKA. (JX 160, Tr. 736-740.)

In addition to the six poles, lights and cameras covered by HKA’s January 25,

2005 proposal COE requested a cost proposal from HKA to add an additional (No.

7) pole, light and camera which proposal Roger Berg (COE) attempted to negotiate

with HKA. (JX 163; Tr. 200-06, 224, 740, 746-48, 1473-93.) The proposal sought

by COE also provided for the deletion of a 1 ½U0 waterline and the installation of a 1U0

waterline for which a credit was sought by COE for the asserted reduced installation

cost. (JX 163.005.) HKA objected to the credit as excessive. (Id.)

Consistent with the Modification No. R00003, dated November 14, 2005,

provision that “permits are not required,” COE proposed to reimburse HKA for the

sewer impact fee amount it was required to pay to the City of Indio to obtain service,

but in the proposal negotiations, HKA insisted that the cost of labor involved, in

driving to the city to pay the fee also be added to the fee amount. (JX 163.004.) In

the proposal negotiations, HKA and COE could not reach agreement on a G&A

(General and Administrative) rate, HKA proposing a rate used for HKA’s work for

Caltrans, which the COE did not consider applicable. (JX 163.005)

-24-

In the absence of agreement on the proposal, Roger Berg recommended that a

unilateral modification be issued as follows, to include a forty-nine calendar-day

extension of the contract performance period:

SM0003 Add Parking Lot Lights Unilateral Cost

Item Description Qty Unit Labor Equip M aterial Unit Cost Total Cost

1 Install additional Light with Pole & Conduit 1 EA 2,500.00 350.00 2,842.00 5,692.00 5,692.00

2 Provide Additional Camera and 1" Conduit 1 EA 0.00 4,200.00

3 Provide 1" PVC water line to future wash rack 200 LF 5.00 2.00 1.40 8.40 1,680.00

4 Provide 1" PVC electrical line to future wash rack 240 LF 5.00 2.00 1.40 8.40 2,016.00

5 Provide Credit for Water line not installed -320 LF 8.00 2.50 3.00 13.50 -4,320.00

6 Provide 2 4 inch conduits from existing Border 250 LF 14.00 3.00 15.00 32.00 8,000.00

Patrol Bldg to new Modular unit

7 Pay Sewer Impact Fees/Inspection Fees 1 0.00 0.00 9,455.00 9,455.00 9,455.00

8 Subtotal 26,723.00

9 Office Support 4 29.00 0.00 29.00 116.00

10 Subtotal 26,839.00

G&A (11%) 2,952.29

Subtotal 29,791.29

Profit (7.2%) Using weighted guidelines. 2,144.97

Subtotal 31,936.26

Bond (2.0%) 638.73

Total 32,574.99

(JX 163.006.)

Unilateral Modification No. R00004, dated November 30, 2005, amended the

contract price by adding $32,574.99, as proposed by Roger Berg, and extended the

contract completion date by forty-nine calendar days. (JX 161.)

On November 22, 2005, HKA (Richard Hernandez) ordered seven light poles

(lamp included) from Walters Wholesale Electric Co., Santa Ana, California and

placed the $10,089.23 amount on his personal Bank of America credit card. (Tr. 374;

JX 43.004-.007.) The $10,089.23 charge included $9,190.00 for the poles, $712.22

for tax and $187.01 for shipping. (Id.)

-25-

On December 13, 2005, HKA submitted a certified claim to Patricia Bonilla,

contracting officer, regarding Unilateral Contract Modification No. R00003, dated

November 14, 2005. (JX 180.) The claim primarily addressed HKA’s contention that

the January 25, 2005 proposal cited in Modification No. R00003 was an additional

scope of work added to the February 2nd solicitation and the estimated costs cited

were for this future additional work. (Tr. 208-230, 299; JX 180.020 (Note 4).)

HKA’s claim form listed costs for the contractors that HKA would pay to

perform the work, Heisler Engineering, Alcorn, General Modular, as well as HKA’s

estimated cost for work it would perform. (JX 180.) Claims were not submitted by

the other contractors to HKA. (Tr. 301-17, 590.)

With respect to the General Modular portion of the claim, as HKA had not been

formally notified that the COE intended to accept the modular building as built, the

claim noted that costs listed were estimated for studies and review needed to

determine modifications required or whether it would be cheaper to construct a new

building. (JX 180.014.) The claim also estimated that HKA needed 119 additional

days for contract superintendent service (Roland Hill) at a daily labor rate of $910.00

(14 hours at $65.00 per hour). HKA used a G&A rate of 172% of direct labor for its

costs and supported this with a Caltrans audit which it attached as exhibit G to its

claim. (JX 180.055.) Also included in the claim was the item “6 Light Poles –

$15,000.” (JX 180.017.) The December 13, 2005 claim set forth HKA’s anticipated

cost of $375,743.69 plus costs of $464,779.08 to be paid to subcontractors

(consultants), for a total of $840,522.77, asserted to be the anticipated cost of work

added by including HKA’s January 25, 2005 proposal as a part of the contract. (JX

180.020.) The claim included the following text:

Since the January 25, 2005 proposal is clearly not part of the contract, the

issue with respect to contract adjustment is what additional work is being required

by Hernandez Kroone that is not part of the February 4, 2005 solicitation and

corresponding proposal and what is the additional cost of that additional work. The

Army Corps never requested a cost proposal from Hernandez Kroone to perform the

additional work. The proposed contract modification was always offered by the

Army Corps without any increase in compensation. If the Army Corps now wants

to require Hernandez Kroone to provide all of the work in the January 25, 2005

proposal and make that part of the contract, it can do that, but only with an

appropriate adjustment in the contract price. The items being added to the contract

and associated dollar value is as shown on the attached spreadsheet.

-26-

It is also important to note that the amounts listed on the spreadsheet are

based on anticipated expenses. Some of the items are based on expected duration of

the additional work. Accordingly, if additional delays and time extensions are

encountered during the performance of the work listed above, additional

compensation may be requested by Hernandez Kroone as part of this dispute. The

numbers listed above are Hernandez Kroone’s best, good faith estimate at the present

time, based on Hernandez Kroone’s knowledge and belief as of this date. Changes

in material availability or price and/or labor availability or price may require

modification to the amounts listed above.

(JX 180.006-.007.)

HKA (Anne Hernandez) followed the December 13, 2005 claim with an e-mail,

dated December 15, 2005, to Patricia Bonilla which included the following text:

Hi Pat,

I sent you a claim via Federal Express and Golden State to make sure that you receive

one or the other. They are both the same claim.

In order to meet the 30 day time limit we sent in a claim that represents our best

effort to compile costs within 30 days. It has come to my attention this morning that

there are still a few errors in it. This is to be expected since we are a small firm and

do not have the man power resources to completely compile a claim of this size

within 30 days and still meet all of our other business commitments. We tried to

resolve as many errors in both math and contract understanding as we could before

submitting the product that you got.

Since this is our first Army Corps project and our first contract which has claims, we

do not have experience in this process. We don’t know if it is better to submit a

prepared claim to the best of our ability within a 30 day time period even though it

may contain errors or to submit a claim at the end of the project when all costs are

known. If we submit a claim at the end of the job, are we still eligible for equitable

adjustment when the contract clause under changes clearly states a 30 day time

period? We made a decision to meet the 30 day time limit assuming that as issues

get resolved on the outstanding design and construction issues, then the claim could

be revised.…

The contract states that we have to submit a claim within 30 days. Our goal is to

submit a claim that represents a fair cost of the extra work required by our team.

Since most of the work hasn’t taken place, the costs in the claim are estimates. We

can clean up the estimated costs as best we can for errors and submit an amended

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claim or we could submit a claim after our true costs are known. Again, we don’t

have the experience to know how to handle this.

(JX 634.)

By letter dated December 15, 2005, to Patricia Bonilla, HKA (Anne

Hernandez) submitted an equitable adjustment claim for additional conduits,

electrical wire, and IID requirements required by the Imperial Irrigation District in

order to obtain electrical service. (JX 635.) As with its December 13, 2005 claim,

the attached cost proposal spreadsheet listed costs for the contractor that would

perform the conduit work, Heisler Engineering, and HKA’s contract administrative

cost. (Id.) The claim spreadsheet listed $11,917.38 (Heisler) and $23,766.83 (HKA)

for a total of $35,684.20 [sic]. (Id.)

By a six-page letter, dated December 20, 2005, to Patricia Bonilla, HKA (Anne

Hernandez) submitted a claim for “Contract Scope Clarification” and for an

“Equitable Adjustment” dependent upon the clarifications. (JX 184.) As with

previous claims, the equitable adjustment listed work to be performed by contractors

Heisler Engineering, Alcorn, General Modular, and HKA activities. (Id.) No costs

were listed. Rather, the cost for any possible work was “TBD” (To Be Determined).

(Id.) COE (Joseph Flynn) responded to HKA’s December 20, 2005 claim with a four-

page letter, dated December 29, 2005, which specifically addressed each requested

clarification. (JX 667.)

By letter dated December 20, 2005, COE (Joseph Flynn) requested HKA

submit a cost proposal for a contract modification to perform additional work

consisting of: 9 additional light fixtures; 5 additional cameras; 2 concrete pads (18'

x 25' and 18' x 45') to allow access to the car wash area; 2 - 8' x 40' CONEX storage

boxes. (JX 642.)

By letter dated December 23, 2005, HKA (Anne Hernandez) submitted a

$29,348.25 claim to Patricia Bonilla concerning unilateral Modification No. R00004,

dated November 30, 2005. (JX 189.) Among the items listed in the claim

spreadsheet was “1 Light Poles - $1,500.00.” (JX 189.018.) HKA also objected to

the $4,320.00 credit in Modification R00004 for the substitution of a 1" PVC water

line for the specified 1-1/2" water line. (JX 189.003.) HKA’s claim included the

following text:

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On page 2 of the contract modification, item 6, one water line is being deleted and

another water line is being installed. The water line being deleted is being deleted

at a cost of $13.50 per foot while the water line being installed is added to the

contract at a price of $8.40 per foot. The material cost between the two sizes of pipe

is $0.24 per foot.

Per negotiations with Roger Berg, Roger stated that the work to construct a 1 ½ inch

water line is significantly higher than that of a 1 inch water line. We strongly

disagree with this statement. The trenching equipment, the depth of the trench, the

labor, etc is all the same. We are not comparing a 4 foot diameter pipe to a 1 inch

water line. We are comparing sizes of pipe that are only ½ inch difference in size.

The additional water line and the deletion of the water line need to be calculated at

the same price for labor, equipment, overhead, etc except for the cost of material

which will be different by $0.24 per foot. This is evidence of the difficulties HKA

incurred during these price negotiations and supports HKA’s claim that the

government did not negotiate in a fair and reasonable manner.

(Id.) HKA’s claim also objected to COE’s refusal to recognize HKA’s G&A rate,

stating that “HKA’s overhead has remained stable during this entire time and has

always been in the range of 165% to 173%.” (JX 189.011.) The claim included the

following text:

During the contract negotiations, Roger Berg refused to recognize HKA’s

audited overhead rate. HKA has been audited in accordance to the FAR 31

guidelines by Caltrans since 1992. These audits have included a full two day audit

at HKA’s offices, compilation of additional supporting documentation or conferences

with our CPA, and a review of HKA’s computer accounting program. Our overhead

rate has remained relatively consistent over the last 10 years. What’s the purpose of

being audited, sometimes several times a year, if the government is going to selective

[sic] ignore the overhead rate when it is convenient for them to do so?

(JX 189.009.)

With respect to COE’s December 20, 2005 request for a cost proposal for

additional work, HKA, on December 28, 2005, proposed a price of $63,232.72. (JX

679.) Upon further negotiations, COE and HKA agreed on a price of $43,000.00 with

a time extension until March 10, 2006, for contract completion. (Id.) Bilateral

Modification No. R00005 was executed on January 23, 2006, increasing the contract

price by $43,000.00 and extending the contract completion date by forty-nine

calendar days. (JX 198.) Unlike Modification No. R00004, which expressly required

HKA to provide and install conduit and wiring for the additional pole light and

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camera involved, Modification No. R00005 does not contain any reference to wiring

for the five additional cameras HKA was to provide and install. (JX 161, 198.)

During the negotiations it was HKA’s (Richard Hernandez) understanding, based on

statements by Roger Berg, that to save funds, Border Patrol personnel would pull

wires to the five cameras. (Tr. 255-56.) However, HKA was subsequently required

to provide the wiring and pull it to the five cameras to obtain final COE acceptance

for the project. (JX 219; Tr. 255-58.)

On January 25 and 27, 2006, Dale E. Kunz, president and owner of Palm

Springs Paving, and Anne Hernandez for HKA executed a $135,835.00 subcontract

providing for Palm Springs Paving to perform the parking lot paving and striping

required in HKA’s contract with COE for the Indio Border Patrol site. (JX 702; Tr.

1930.) The paving was completed on February 14, 2006, using the 3/4" aggregate in

the asphalt mix as specified. (JX 87, 710; Tr. 245, 1932.) Palm Springs signed a

release to obtain its final payment for the work. (JX 778.)

On March 16, 2006, Patricia Bonilla, as contracting officer, issued a final

decision on HKA’s December 13, 2005 claim which was based on the contention that

the work included in HKA’s January 25, 2005 proposal, referenced in Contract

Modification No. R00003, was outside the scope of the contract awarded. (JX 217.)

The contracting officer’s decision comprised sixty numbered findings and discussions

covering the formation of the COE-HKA contract for the Indio, California Border

Patrol Station and relevant contract performance activity. (Id.) HKA’s December 13,

2005 claim was denied in that the contracting officer concluded, among other items,

that Contract Modification No. R00003 (SM004):

[w]as not an attempt to include additional work under the contract. The Corps was

not trying to expand the scope of HKA’s work by referring to its January 25 proposal,

but was trying to document the terms of the agreement that HKA agreed to perform

under this contract and avoid further dispute.

(JX 217.015-.016.) The Contracting Officer’s Decision denied HKA’s December 13,

2005 claim based on a determination as to the agreed contractual scope of work, and

did not address any specific cost items asserted by HKA, except to note, “for

argument’s sake,” if any contract price increase were to be awarded, “Installing

parking lot lighting and security cameras would not nearly double the dollar value of

the entire contract.” (JX 217.017.)

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By letter dated April 5, 2006, COE (Paul Apodaca) notified HKA of

deficiencies that needed to be corrected prior to the final inspection of the project.

(JX 219.) Several noted deficiencies related to the appearance of the parking lot.

(Id.) The use of the specified 3/4" aggregate mix caused the lot surface to have a

coarse “popcorn” appearance which was not acceptable to the Border Patrol. (JX

219; Tr. 249-50, 1931-32.) The only feasible cure for this “popcorn” appearance was

to apply a complete seal coat “slurry” to the entire surface and then restripe the lot.

(JX 219; Tr. 250-55, 1933.) Palm Springs Paving provided HKA with a bid of

$7,985.00 covering the application of the seal coat and restriping the parking lot,

proceeded to perform this work and billed HKA for $7,985.00. (JX 753; Tr. 1934-35,

2505.) To date, Palm Springs has not been paid for the seal coat application and lot

restriping. (Tr. 1935.) Palm Springs expects to be paid by HKA and has continued

to invoice HKA for the $7,985.00. (Tr. 1937-38, 2509-10.) HKA admits it owes

Palm Springs for this additional work. (Tr. 420-21.)

The final inspection for the Indio Border Patrol Station project was held on

April 20, 2006, and the government accepted beneficial occupancy of the project on

that date. (JX 225.) Although this date was forty days past the contract completion

date, no liquidated damages were assessed against HKA. (JX 225; Tr. 982-83.)

By letter dated May 3, 2006, HKA (Anne Hernandez) submitted a claim to

COE (Daniel Moore, Administrative Contracting Officer) relating to COE’s (Paul

Apodaca’s) letter of April 5, 2006. (JX 227, 766.) Additional compensation was

sought for the sealing and restriping of the parking lot and for the installation of wire

to the five cameras added by Modification No. R00005. (Id.) The anticipated claim

expense submitted for the seal coat and restriping was $10,267.32. (JX 766.021.)

HKA’s December 23, 2005 claim, concerning unilateral Modification No.

R00004, was denied on June 6, 2006, by Patricia Bonilla, COE contracting officer.

(JX 235.) The Contracting Officer’s Decision stated that she found no merit in

HKA’s request for additional compensation and the decision included eighteen

numbered findings and discussion to support her determination. (Id.)

HKA commenced litigation in this court by filing a complaint on March 13,

2007 (ECF No. 1), comprising a de novo direct action on its claims pursuant to 41

U.S.C. § 7104(b)(1). A First Amended Complaint (ECF No. 10) was filed on June

4, 2007.

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Following an order, filed October 5, 2009 (ECF No. 64), denying Defendant’s

Motion to Dismiss For Lack of Jurisdiction (ECF No. 49), defendant filed its

Amended Answer to Plaintiff’s First Amended Complaint and Defendant’s

Counterclaims (ECF No. 82). A two-week trial was held in Pasadena, California

where testimony from the following witnesses was presented: Richard Hernandez,

HKA co-owner; Anne Hernandez, HKA co-owner; Patricia Bonilla, COE; LaVette

Buford, COE; Roger Berg, COE; Joseph Flynn, COE; Larry Romero, COE; Dale

Kuntz, Palm Springs Paving; John Bennett, General Modular Corporation; and Craig

Sorensen, HKA. A following one-day trial session was held in Washington, DC

where defendant presented the testimony of George Strickler and plaintiff presented

rebuttal testimony from Richard Hernandez.

DISCUSSION

Under the Contract Disputes Act, submission of a claim to the contracting

officer is a necessary prerequisite to bringing a direct action suit upon denial of the

claim, but the proceeding on the matter in this court is de novo, not an appeal of the

contracting officer’s denial. 41 U.S.C. §§ 7103(e) (“specific findings of fact [in a

contracting officer’s decision] are not binding in any subsequent proceeding”),

7104(b)(4) (following a contracting officer’s decision, “an action [on a claim] shall

proceed de novo”); Paragon Energy Corp. v. United States, 227 Ct. Cl. 176, 645 F.2d

966, 972-75 (1981); Wilner v. United States, 24 F.3d 1397, 1401 (Fed. Cir. 1994).

The contracting officer’s final decision is relevant in the de novo proceedings insofar

as it is a jurisdictional prerequisite for a CDA suit. See M. Maropakis Carpentry, Inc.

v. United States, 609 F.3d 1323, 1327-28 (Fed. Cir. 2010).

Plaintiff’s claims will be addressed initially. Plaintiff’s main claim, as

presented in this court, stems from Modification No. R00003 to the contract

clarifying that the scope of the work under the contract includes plaintiff’s January

25, 2005 proposal. Plaintiff asserts that this increased the contractual scope of work,

particularly with respect to providing and installing lighting and security cameras on

the site, in particular, the six lights and six cameras provided in plaintiff’s January 25,

2005 proposal. Equitable adjustments of differing amounts were proposed during

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pretrial proceedings, but the trial testimony seeks $240,148.00 for “adding” lights and

cameras via Modification No. R00003. (Tr. 2366-67, 2380.3/)

Whether plaintiff has a viable additional compensation claim for installation

of six lights and six cameras depends upon whether its January 25, 2005 proposal was

included in the contract awarded on March 29, 2005.

In resolving whether plaintiff’s January 25, 2005 proposal was included in the

contractual agreement, reliance is placed on the “truism that how the parties act under

the arrangement, before the advent of controversy, is often more revealing than the

dry language of the written agreement by itself.” See Pacific Gas & Elec. Co. v.

United States, 536 F.3d 1282, 1290-91 (Fed. Cir. 2008) (citing Macke Co. v. United

States, 199 Ct. Cl. 552, 556, 467 F.2d 1323, 1325 (1972)).

The facts show that following the award of the contract on March 29, 2005,

which referenced plaintiff’s January 25th proposal, and was at the price contained in

plaintiff’s January 25th proposal, plaintiff’s contract performance demonstrated the

inclusion of its January 25th proposal in the award. For example, the scope of work

in HKA’s June 4, 2005 subcontract agreement with General Modular Corporation for

the modular building employed the Walden Structures’ specification included in

HKA’s January 25th proposal providing for a “black EPDM over ½ gyp sheathing”

flat roof, not the “pitched roof” COE original guide included in the subsequent COE

solicitation.

The COE price negotiations memorandum for bilateral contract Modification

No. R00001 states that the sums were adjusted to provide funding to HKA “[t]o

compensate the contractor for his bonding costs which were not in the original

proposal, since this was initially going to be done as a service contract.” (JX

3/

Defendant seeks to have the testimony of plaintiff’s expert, Craig Sorensen, stricken

because of the various changes in the amounts proposed during pretrial and trial without adequate

notice to defendant’s counsel. (Def.’s Post Trial Brief (DPB) 5-12, ECF No. 188.) Failure to

comply with pretrial rules and orders can not be condoned, but it is noted that strict compliance was

a problem for both parties. (Tr. 2295, 2311-13.) Disclosure failure by plaintiff has not served to

prejudice defendant’s case. Additional time and a second trial session to take testimony from

defendant’s expert, George Strickler, was provided. Craig Sorensen’s testimony is not stricken in

these circumstances.

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282.002.) If the March 29, 2005 award did not include HKA’s January 25, 2005

proposal, the “original proposal” and what it included would have been irrelevant.

On June 27, 2005, HKA filed a claim contesting a COE letter stating that HKA

was responsible for City of Indio sewer/water impact fees required to obtain water

service for the Border Patrol project. (JX 430.) As detailed in the findings, supra,

HKA relied on COE actions in obtaining removal of costs for sewer/water impact fees

from the proposals submitted by General Modular and the January 25, 2005 HKA

proposal to support its claim that the cost had been removed from the contract. This

claim resulted in bilateral contract Modification No. R00002 increasing the contract

price $18,973.90 to cover the water impact fee HKA had to pay the City of Indio. (JX

302.)

HKA’s submissions, commencing in July 2005, of the several preconstruction

plans required by the contract included HKA’s listing of the contract work required.

Among the work items listed in HKA’s plans were: security lighting; video cameras;

erection of light poles; lighting; and erection of light standards. The Schedule of

Values HKA submitted in July, 2005, for use to obtain progress payments included:

“Security Cameras;” “Site Lighting.”4/

Riverside Engineering Group submitted a proposal to HKA on July 25, 2005,

to provide “electrical design for installation of new client provided modular office

bldg.” The proposal included “[p]arking lot lighting plan, pole base detail and point

x point lighting calculations.” (JX 18.) HKA accepted the proposal and a

subcontract was executed on or about August 1, 2005. (JX 36.) In September,

Riverside provided a lighting layout sketch to HKA and inquired if another light

should be added. (JX 41.)

4/

In testimony, Anne Hernandez, asserted that Joseph Flynn, the contracting officer’s

representative, orally required these items be included in the Schedule of Values in order for HKA

to obtain progress payments. (Tr. 679-80.) However, in contrast to the prompt filing of a claim on

June 27, 2005, when HKA received instructions from the COE that HKA was responsible for City

of Indio water/sewer fees, no similar claim action was taken by HKA at the time of the instructions

Anne Hernandez testified she received with respect to the content of the Schedule of Values. The

first invoice HKA submitted on August 2, 2005, which included work on the civil plans, employed

the Schedule of Values containing security cameras and site lighting. (JX 458.005.)

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The August progress report HKA submitted to COE noted that the electrical

design would be complete at the end of the month, including “site lighting

parameters, costs and availability.” (JX 465.) The construction schedule HKA

submitted to COE on September 9, 2005, covered installation of lights and security

cameras and stated that the light standard bases would be poured in October, the

lights and poles erected and security cameras installed in November. (JX 471.)

In summary, as detailed in the Findings, supra, following the submission of a

$942,273.00 proposal by GMC to the Fort Worth COE on December 8, 2004, for the

Indio Border Patrol Project, which included HKA as a $39,044.50 subcontractor,

negotiations with COE reduced the proposal to $875,768.00. The COE determined

not to proceed with GMC, but to award an 8(a) sole source contract, which resulted

in a switch with HKA, an 8(a) contractor, acquiring all of GMC’s bid material and

then submitting a January 25, 2005 $875,768.00 proposal to COE. GMC became an

HKA subcontractor. To proceed with awarding a sole source 8(a) contract, Fort

Worth COE developed a solicitation and HKA responded with a $875,468.00 offer.

Fort Worth COE then issued an award, referencing HKA’s January 25, 2005 proposal

and a contract price of $875,768.00. Payment and performance bonds were provided

at the $875,768.00 price. The administration of the contract was then transferred

from Fort Worth COE to Los Angeles COE.

Except for the action of the parties under the arrangement, the various

proposals and negotiations leading to the award followed by the transfer of contract

administration could lead to confusion as to scope of the work involved and to the

specifications on which agreement was reached. However, here there is clear

evidence of the intent of the parties in their actions and conduct before a dispute

arose, relying on the inclusion of plaintiff’s January 25, 2005 proposal in the award,

particularly the provision of six lights and six cameras and their installation, plus the

Walden Structures modular building specifications also included in plaintiff’s

subcontract with GMC. As the court noted in Macke, 199 Ct. Cl. at 556, 467 F.2d at

1325, “We are, of course, entirely justified in relying on this material to discover the

parties’ underlying intention.” See also Alvin, Ltd. v. United States Postal Serv., 816

F.2d 1562, 1564-67 (Fed. Cir. 1987); Blinderman Constr. Co. v. United States, 695

F.2d 552, 558 (Fed. Cir. 1982); Truong Xuan Truc v. United States, 212 Ct. Cl. 51,

61 (1976). The evidence gleaned from the actions and conduct of the parties before

a dispute arose is convincing to the extent that were it to be concluded that HKA’s

January 25, 2005 proposal was not expressly incorporated in the March 29, 2005

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award, the contract would be reformed to reflect the parties’ actual understanding.

Sw. Welding & Mfg. Co. v. United States, 373 F.2d 982, 989-91, 179 Ct. Cl. 39

(1967); Pacific Gas & Elec. Co., 536 F.3d at 1290-91. In effect, Modification No.

R00003 serves this function in that it either reflects the inclusion of HKA’s January

25, 2005 proposal in the contract awarded, or accomplishes its reformation to reflect

the parties’ actual understanding in this regard. In either event, Modification No.

R00003 does not add work to the scope of the contract and plaintiff’s primary claim,

based on this contention, lacks validity.

According to plaintiff’s “Closing Brief” (ECF No. 189 at 22-23), beyond the

direct action claims relating to Modification No. R00003, derived from its December

13, 2005 claim to the contracting officer, there only remains for resolution two de

novo direct action claims. One is derived from HKA’s December 23, 2005 claim to

the contracting officer contesting a $4,320.00 credit taken in Modification No.

R00004 for the substitution of a 1" PVC water line for the specified 1 ½" water line,

and the second is a direct action claim derived from HKA’s May 3, 2006 claim to the

administrative contracting officer covering the sealing and restriping of the Indio

Border Patrol project parking lot.5/

With respect to the $4,320.00 credit taken by COE in Modification No.

R00004, involving the deletion of 320 linear feet (LF) of 1 ½" PVC waterline from

the contract, the COE’s negotiator, Roger Berg, explained that the credit was based

“only upon the cost of the installation of the 1 ½" waterline.” (JX 163.005.) Roger

Berg asserted that “There is considerably more cost in installing a 1 ½" waterline than

a 1" waterline.” (Id.) HKA’s co-owner, Richard Hernandez, testified that he

explained to Roger Berg that there was no difference in installation cost between a

1" PVC pipe waterline and a 1 ½" PVC pipe waterline, there was only a material cost

difference of 24 cents per linear foot, but the full $4,320.00 deduction was retained

in Unilateral Modification No. R00004 and in the contract price HKA was paid. (Tr.

243-44.) In his analysis of plaintiff’s claim, defendant’s expert, George Strickler,

5/

To the extent that any claim for delay costs remains extant requiring resolution, the

submissions by the two expert witnesses have been carefully reviewed and based on the analysis by

George Strickler, it is concluded that no critical path delay in contract completion was the

responsibility of the COE. Delay occurring was concurrent with the result that no basis for

additional monetary compensation in this regard has been proven. (JX 803.013; Tr. 2513-16.) See

Sauer Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000); Commerce Int’l Co. v. United States,

167 Ct. Cl. 529, 543, 338 F.2d 81, 89 (1964).

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essentially agrees with Richard Hernandez, stating, “Based on experience, there is

little, if any, cost differential for the labor and equipment to install 1" in lieu of 1 ½"

PVC pipe.” (JX 803.063.) Roger Berg’s negotiation recommendation for R00004

listed the labor cost for installation of 1" PVC pipe at $5.00 per LF, the equipment

cost at $2.00 per LF and the material cost at $1.40 per LF. (JX 163.006.) For the

$4,320.00 credit taken for deletion of 1 ½" PVC pipe, the labor cost was $8.00 per

LF, the equipment cost was $2.50 per LF, and the material cost was $3.00 per LF.

(Id.) Reducing the labor and equipment costs for 1 ½" PVC pipe to those listed for

1" PVC pipe and adding 24 cents per LF for the higher 1 ½" PVC pipe material cost

results in a deduction of $8.64 per LF, as opposed to the $13.50 per LF deduction

utilized by COE in Modification No. R00004. Using the $8.64 deduction, the

appropriate credit for deleting 320 LF from the contract requirements equals

$2,764.80. The predominate evidence supports a conclusion that the R00004

unilateral modification included a credit taken by COE which was excessive in the

amount of $1,555.20 and that the contract price should be so increased to reflect this

reduction in the credit amount ($4,320.00 credit taken minus $2,764.80 credit that

should have been taken).

The remaining de novo direct action claim requiring resolution seeks $9,366.00

for extra work in applying seal coat to the parking lot to cure a “popcorn-like”

appearance caused by the use of 3/4" aggregate in the asphalt and the restriping

required after the seal coat was applied. (Tr. 2366; PX 10106.001.)

The use of the 3/4" aggregate in the asphalt mix for the parking lot paving was

required by the COE and caused the “popcorn” appearance deficiency cited by COE.

The requirement to correct this “deficiency” was, in effect, a directive to perform

additional work not covered by the contract for which an adjustment is required

increasing the contract price. C. Sanchez & Son, Inc. v. United States, 6 F.3d 1539,

1544 (Fed. Cir. 1993); Changes 52.243-4 (JX 381.095-.096). Palm Springs Paving

provided HKA with its $7,985.00 bid covering the seal coat application and the lot

restriping, performed the work and billed HKA for $7,985.00, which remains unpaid

to date. HKA asserts its direct action claim for this work, adding an HKA mark-up

of 15% and a 2% mark-up for HKA bond, bringing the claim involved to $9,366.00.

(PX 10106.001; Tr. 2332-33.) Plaintiff’s expert, Craig Sorensen, supports the

addition of the 15% as a “fee on the work” that he customarily uses in his work on

claims and HKA used during the course of the contract. (Tr. 2333.) The 2% bond

is the sum HKA and the government used in pricing the work. (Id.) Defendant’s

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expert, George Strickler, provided a reasonable objection to any mark-up on behalf

of Palm Springs Paving to its $7,985.00 invoice as its price appeared to be all

inclusive of profit and bond. (JX 803.064.) No objection was expressed to the

HKA’s mark-ups. (Id.)

Defendant opposes recovery for the seal coat and restriping based on the

Severin doctrine which, when applicable, requires that for a claim asserted by a prime

contractor on behalf of a subcontractor, the prime contractor, such as HKA, must be

liable to the subcontractor for the costs in suit. E. R. Mitchell Constr. Co. v. Danzig,

175 F.3d 1369, 1370-71 (Fed. Cir. 1999). The Severin doctrine is not applicable

when the relief sought is an equitable adjustment under the changes clause of the

prime contract as is involved here. Blount Bros. Constr. Co. v. United States, 172 Ct.

Cl. 1, 348 F.2d 471 (1965). In any event, if the Severin doctrine were applicable,

defendant has the burden to prove HKA is not liable to Palm Springs Paving for the

$7,985.00. (Id.) Attempting to meet its burden of proof defendant cites the release

Palm Springs Paving gave HKA to obtain the final payment under its original

$135,835.00 subcontract for the paving lot work. However, the $7,985.00 claim at

issue is for the separate work of seal coating and restriping thereafter, work not

covered by the original subcontract, and for which Palm Springs Paving submitted

a separate bid. Defendant has not proven that any binding release exists with respect

to the $7,985.00 which Palm Springs Paving seeks to recover from HKA and which

HKA agrees it owes. Defendant also asserts that the four-year California statute of

limitations, Cal. Civ. Pro. Code § 337, now bars Palm Springs Paving from suing

HKA for the unpaid $7,985.00 debt, so that HKA is not liable. Defendant, however,

does not address the application of Cal. Civ. Pro. Code § 360, acknowledgment or

promise sufficient to take case out of statute of limitations. Here, HKA has

acknowledged it owes Palm Springs Paving the $7,985.00 and has timely asserted an

equitable adjustment claim to recover the sum plus its fee and bond cost. Were the

Severin doctrine applicable, defendant has not satisfied its burden of proving HKA

has no liability to its subcontractor for this work. Accordingly, plaintiff is entitled to

an equitable adjustment increasing the contract price by $9,366.00.

Finally, the validity of the defendant’s counterclaims, pleaded pursuant to 28

U.S.C. § 2514, 41 U.S.C. § 7103 and 31 U.S.C. § 3729, must be resolved. These

counterclaims addressing mainly the December 13, 2005 CDA claim HKA submitted

to the contracting officer, were set forth in Defendant’s Amended Answer. (ECF No.

82.) This Amended Answer was filed, by leave of court, following the Order (ECF

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No. 64) denying Defendant’s Motion to Dismiss this litigation on the assertion that

the CDA claims HKA submitted lacked validity as no “sum certain” was sought.

Todd Constr., L.P. v. United States, 656 F.3d 1306, 1310-14 (Fed. Cir. 2011); H. L.

Smith, Inc. v. Dalton, 49 F.3d 1563 (Fed. Cir. 1995).

The contemporary documents establish that the CDA claims defendant

addresses in its counterclaims were triggered by COE’s erroneous assertion to HKA

in October of 2005, that the modular building as constructed by Walden Structures

did not conform to the contract specifications. This assertion could only be accurate

if HKA’s January 25, 2005 proposal was not included as a part of the contract. This

is because the modular building was constructed in accordance with the Walden

specifications, which includes, for example, a flat roof, as set forth in HKA’s January

25, 2005 proposal and HKA’s subcontract with GMC, but was not constructed in

conformance with the subsequent COE bid solicitation which omitted the Walden

specifications and included only the original COE guide. This original COE guide

scope of work provided for a pitched roof on the modular building.

COE’s assertion of modular building deficiency, in apparent reliance on the

original COE guide scope of work was inconsistent with its position that HKA’s

January 25, 2005 proposal was a part of the contract and caused considerable concern

for HKA as to the applicable scope of work, and whether the modular building, as

built, may have to be replaced at HKA’s expense. HKA’s letter of October 24, 2005

to the contracting officer details this concern, “If the March 11, 2005 specifications

[the original COE guide] are part of my contract, then my subcontractor may need to

default.” (JX 537.) HKA and COE continued to review their positions as to the

contract scope and requirements with HKA, after some inconsistent assertions,

reaching the conclusion that its January 25, 2005 proposal was not part of the

awarded contract, and COE concluding that it was. Following settlement negotiations

which terminated after COE proposed a bilateral contract amendment which HKA

rejected as not reflecting the parties’ agreements, COE issued its tendered proposal

as unilateral contract Modification No. R00003. The modification, among other

items, established HKA’s January 25, 2005, 21-page proposal as the scope of work

for the project but provided that the Walden specifications were to govern if there

were any conflicts with the original COE guide scope of work.

Consistent with its position, HKA treated Modification No. R00003 as a

change requiring additional work beyond the scope of the contract. Contract Clause

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52.243-4 “CHANGES,” contemplates that the contracting officer will make an

equitable adjustment in the contract price if a change causes an increase in HKA’s

cost of contract performance. (JX 0381.095-.096.) Referencing Modification No.

R00003, Administrative Contracting Officer Daniel Moore, by letter, dated November

15, 2005, notified HKA as follows:

You are hereby reminded of the following requirements contained in this clause with

regard to the subject modification:

“(e) The Contractor must assert its right to an adjustment under this

clause within 30 days after (1) receipt of a written change order under

paragraph (a) of this clause or (2) the furnishing of a written notice

under paragraph (b) of this clause, by submitting to the Contracting

Officer a written statement describing the general nature and amount

of the proposal unless this period is extended by the Government.

The statement of proposal for adjustment may be included in the

notice under paragraph (b) of this clause.”

Thus, if you intend to assert any rights for adjustment regarding the subject

modification, the required statement and proposal must be received by this office no

later than December 14, 2005.

(JX 150.)

HKA incorrectly assumed that the requirement in the Contract Clause 52.243-4

to submit, within 30 days, “[a] written statement describing the general nature and

amount of the proposal” meant submitting a contract claim in accordance with the

CDA. COE did not correct HKA’s assumption. Accordingly, on December 13, 2005,

HKA (Anne Hernandez), while expressing reservations as to this small 8(a)

company’s ability, “to compile a claim of this size within 30 days ” transmitted to the

contracting officer a claim, pursuant to Contract Clause 52.233-1 “Disputes,” for an

equitable adjustment totaling $840,522.77. (JX 180, 634.) The claim included nine

pages of text, eleven pages of spreadsheets and some forty pages of exhibits. This

claim is the primary source for defendant’s counterclaims and the specific

counterclaim assertions will be addressed in the context of the statutory requirements

involved.

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As noted previously, defendant’s counterclaims are asserted pursuant to 31

U.S.C. § 3729 (False Claims Act), 41 U.S.C. § 7103 (CDA), and 28 U.S.C. § 2514

(Special Plea in Fraud).

The False Claims Act (FCA) provides, in relevant part, that, in the situation

here, where no actual damages are sought, “any person who … knowingly presents

or causes to be presented, a false or fraudulent claim for payment or approval,” is

liable “for a civil penalty of not less than $[5,500] and not more than $[11,000].” 31

U.S.C. § 3729(a)(1); cf. 28 C.F.R. § 85.3(a)(9) (civil penalties adjusted for inflation).

The government must establish that the claim presented was false or fraudulent, and

that the presenter knew the claim was false or fraudulent. Young-Montenay, Inc. v.

United States, 15 F.3d 1040, 1043 (Fed. Cir. 1994). “Knowingly” is defined as

“actual knowledge,” acting “in deliberate ignorance of the truth or falsity of the

information,” or acting “in reckless disregard of the truth or falsity of information.”

31 U.S.C. § 3729(b). No proof of specific intent to defraud is required. Id. The

government must prove the elements of the cause of action by a preponderance of the

evidence. Commercial Contractors, Inc. v. United States, 154 F.3d 1357, 1362 (Fed.

Cir. 1998).

The fraud provision of the CDA provides, in relevant part:

If a contractor is unable to support any part of the contractor’s claim and it is

determined that the inability is attributable to a misrepresentation of fact or fraud by

the contractor, then the contractor is liable to the Federal Government for an amount

equal to the unsupported part of the claim plus all of the Federal Government’s costs

attributable to reviewing the unsupported part of the claim. Liability under this

paragraph shall be determined within 6 years of the commission of the

misrepresentation of fact or fraud.

41 U.S.C. § 7103(c)(2).6/

The CDA defines the term “misrepresentation of fact” as meaning “a false

statement of substantive fact, or conduct that leads to a belief of a substantive fact

6/

By the Act of January 4, 2011, Pub. L. No. 111-350, 124 Stat. 3677, the CDA was amended

and enacted into positive law. The CDA provisions were relocated from 41 U.S.C. §§ 601-13 (2006)

to 41 U.S.C. §§ 7101-09. Comparing 41 U.S.C. § 7103(c)(2) with its source, 41 U.S.C. § 604

(2006), confirms the absence of any substantive change.

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material to proper understanding of the matter in hand, made with intent to deceive

or mislead.” 41 U.S.C. § 7101(9). The government must establish this falsity and

intent by a preponderance of the evidence. Daewoo Eng’g & Constr. Co. v. United

States, 557 F.3d 1332, 1335 (Fed. Cir. 2009).

Defendant’s counterclaims (ECF No. 82 at 15) also include a request for

forfeiture of HKA’s claims pursuant to 28 U.S.C. § 2514, which provides:

A claim against the United States shall be forfeited to the United States by

any person who corruptly practices or attempts to practice any fraud against the

United States in the proof, statement, establishment, or allowance thereof.

In such cases the United States Court of Federal Claims shall specifically find

such fraud or attempt and render judgment of forfeiture.

In order to obtain a judgment of forfeiture under 28 U.S.C. § 2514, the defendant

must establish by clear and convincing evidence that HKA knew that its submitted

claims cited were false and that it intended to defraud the government by submitting

the cited claims. Daewoo, 557 F.3d at 1341; Young-Montenay, Inc. v. United States,

15 F.3d 1040, 1042 (Fed. Cir. 1994). Proof of negligence or ineptitude does not meet

the standard of clear and convincing evidence. Miller v. United States, 213 Ct. Cl.

59, 68; 550 F.2d 17, 22 (1977). Clear and convincing evidence imposes a heavier

burden on a litigant than proof by preponderant evidence but a lighter burden than

requiring proof beyond a reasonable doubt. Am-Pro Protective Agency, Inc. v. United

States, 281 F.3d 1234, 1239-40 (Fed. Cir. 2002); see generally Grand Acadian, Inc.

v. United States, 105 Fed. Cl. 447, 456-58 (2012).

As bases for its counterclaims, defendant sets forth a number of asserted

“falsities” in the CDA claims HKA submitted to the contracting officer,

predominantly in the December 13, 2005 claim for an equitable adjustment based on

the assertion that Modification No. R00003 comprised a change in the contract scope

of work by adding HKA’s January 25, 2005 proposal. The HKA December 13, 2005

claim purports to detail the estimated cost of adding the January 25, 2005 proposal

to the scope of work HKA was to perform together with the resulting time extension.

Defendant asserts that HKA’s claim that Modification No. R00003 comprised

a change in the contract scope of work was a “falsity.” (Tr. 1958-60.) As discussed

previously, the rejection of HKA’s claim for an equitable adjustment based on

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Modification No. R00003 relies on the conduct of the parties before this dispute

arose. However, the somewhat unorthodox manner in which the contract was

negotiated initially with GMC and subsequently with HKA to satisfy an 8(a) award

obligation, left ample room for argument as to the scope of work involved. The

preponderant record evidence shows that after the review triggered by the COE’s

erroneous assertion that the modular building, as built, did not conform to the contract

specifications, HKA evolved to the view that its January 25, 2005 proposal was not

part of the awarded contract. This view was seriously researched by COE and

debated at a COE-HKA meeting on November 9, 2005. A purported settlement then

failed, and unilateral Modification No. R00003 was issued. Based upon full

consideration of the record evidence, including the testimony of all witnesses, it is

concluded there exists no viable evidence to support defendant’s assertion that HKA

did not, after October of 2005, believe that the contract, as awarded, did not include

HKA’s January 25, 2005 proposal. Rather the evidence supports HKA’s sincerity in

this regard, if not its validity, and HKA did not knowingly present a false or

fraudulent claim on December 13, 2005 or thereafter by asserting that their January

25, 2005 proposal was not part of the scope of work in the awarded contract.

Defendant also asserts that HKA’s listing of contractors in its claims submitted

to the contracting officer comprised a falsity because contractors, such as GMC, did

not submit a claim to HKA. (DPB 42-44, ECF No. 188; Tr. 1950-53.) This

contention is based upon a misunderstanding of HKA’s claims. HKA sought an

equitable adjustment to cover what it considered to be added work imposed by

unilateral Modification No. R00003. HKA’s claims attempted to estimate the cost

for this asserted added work and also identified the contractors that HKA anticipated

using for the work involved. For example, when asked why he listed Heisler

Engineering, Richard Hernandez responded, “At the time he was the person we

anticipated using to install.” (Tr. 211.) As is discussed previously with respect to

HKA’s claim for sealing and restriping the parking lot, the Severin doctrine requiring

that liability to a subcontractor be shown, is not applicable to an equitable adjustment

claim such as HKA presented. Blount Bros. Constr. Co. v. United States, 172 Ct. Cl.

1, 6-7 348 F.2d 471, 473-74 (1965). The claims are HKA’s not those of the

contractors listed. As Richard Hernandez testified with respect to the General

Modular listing in HKA’s December 13, 2005 claim, “The contract was with us. If

GMC didn’t perform, we would have to do it.” (Tr. 298.) The listing in HKA’s

claims of contractors anticipated to perform the work and the estimated cost involved,

in the absence of claims from the contractors does not comprise a “falsity.” Richard

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Hernandez testified he developed the estimated costs listed in the claim spreadsheets

with the aid of Caltrans data and rental rate books. (Tr. 211.) Use of rate compilation

books to estimate cost is an accepted construction industry practice. See Cornell

Wrecking Co. v. United States, 184 Ct. Cl. 289, 291 (1968) (AGC (Associated

General Contractor) rates).

Defendant claims that HKA’s use of 172 percent of direct labor as its G&A rate

in its claims is a “falsity.” (Tr. 1955; DPB 45-46, ECF No. 188.) However,

defendant offered no proof that the claimed rate was false. Defendant’s expert,

George Strickler, testified that G&A rates for an engineering company like HKA are

often allocated over direct non-contract labor with the result that the rates, in his

experience, tend to be a lot higher than for a construction company. (Tr. 2598-99.)

However, Mr. Strickler testified he had not seen the calculation of the 172% and

offered no opinion as to its validity. (Id.) To support its 172% rate, HKA included

an August 25, 2004 Caltrans “Preaward Evaluation” as Exhibit G to its December 13,

2005 claim. The evaluation was for a contract to provide right-of-way engineering

and land surveying services and was conducted in accordance with the “Attestation

Standards set forth in the General Accounting Office’s Generally Accepted

Government Auditing Standards.” (JX 180.055.) The report states that it is “intended

for the information of Department Management and the Federal Highway

Administration.” (JX 180.060.) The evaluation noted that, “We also assessed the

accounting principles used and significant estimates made by the contractor, as well

as evaluated compliance with the CFR 49, Part 18; CFR 48, Chapter 1, Part 31.” (JX

180.056.) The evaluation also noted that indirect rates were reviewed for the purpose

of accepting contract progress billings. (Id.) The evaluation’s Finding 4 states:

The proposed combined indirect cost rate is 172.00 percent. However, we noted

several adjustments. As a result, we determined a combined indirect cost rate of 165

percent to be appropriate for this contract.

Recommendation: We recommend the Department’s Contract

Manger [sic] adjust the indirect cost rate to 165 percent.

(JX 180.060.) The Caltrans evaluation does not support defendant’s assertion that the

claimed 172% G&A rate is false. It merely states that adjustments for the 2004

contract there involved results in a recommendation that, while 172% was proposed,

165% was appropriate for that contract. HKA’s December 23, 2005 claim asserts that

its G&A rate was stable and has “always been in the range of 165% to 173%.” (JX

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189.011.) No probative record evidence has been cited to prove the contrary. (See,

e.g., Tr. 2622-23.) In this circumstance, defendant has not carried its burden of proof

and the 172% rate has not been proven to comprise a “falsity.”

Defendant asserts that the spreadsheet item in HKA’s December 13, 2005

claim, “6 Light Poles – $15,000” as an estimate comprises another “falsity.” (JX

180.017; Tr. 373, 1949-50; DPB 42, ECF No. 188.) Defendant’s “falsity” label is

based on the action Richard Hernandez took on November 22, 2005, to charge seven

light poles from “WALTERS WHLSL ELECTRIC” for $10,089.23 to his personal

credit card. Defendant asserts it comprises a falsity to use a $15,000.00 estimate for

six poles when it is asserted that by December 13, 2005, HKA had an actual paid

expense of “$10,890” [sic] for seven poles which should have been used. (Tr. 374;

DPB 42, ECF No. 188.) The problem with defendant’s scenario is that Mr.

Hernandez’s personal credit card statement containing, among other items, a

$10,089.23 charge (and a $35.00 overlimit fee), was not received by HKA until

December 16, 2005, with a minimum payment due date of December 31, 2005. (JX

43.007.) Based on HKA’s accounting system, the matter would likely not be

recorded until the credit card statement was paid. (Tr. 372.) Preparing a substantial

claim for submission to the contracting officer within the assumed 30-day deadline

ending December 14, 2005, it is reasonable that Mr. Hernandez would utilize an

estimate. If the November 22, 2005 order was placed by telephone, HKA would have

no record until the credit card statement was received. (Tr. 372-75.) As noted, HKA

received Mr. Hernandez’s credit card statement containing the $10,089.23 charge for

seven poles on December 16, 2005. HKA’s December 23, 2005 claim concerning

Modification No. R00004, which added another pole, included the spreadsheet item

“1 Light Poles – $1,500.” (JX 189.018.) This $1,500.00 sum is roughly consistent

with the amount on the credit card charge statement received by HKA on December

16, 2005 ($10,089 ÷ 7 = $1,441) and serves to indicate that the prior pole estimate

($15,000 ÷ 6 = $2,500) was replaced by actual cost after the credit card statement was

received by HKA. Moreover, as noted by defendant’s expert, George Strickler, for

the single pole HKA furnished for Modification No. R00004, COE inserted a material

cost of $2,842.00. (JX 803.052.) This was the sum estimated by Roger Berg (COE),

not by HKA, for inclusion in the unilateral Modification. (JX 163.006.) No proof of

a knowing “falsity” has been established in the record evidence on this $15,000.00

estimate matter.

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Defendant asserts that mark-ups HKA included in its claim estimates for work

to be performed by other contractors comprised a “falsity.” The two mark-ups

involved were 17 percent and 15 percent, both applied to the estimated contractor

labor cost. (DPB 44, ECF No. 188; Tr. 357-67.) The mark-ups are transparently

stated in HKA’s CDA claims. (See, e.g., JX 180.12, 180.15.) Mr. Hernandez

testified that the numbers were part of his “estimated level of effort that I was

supposed to require to get the work [January 25, 2005 proposal] done.” (Tr. 366.)

Defendant offered no evidence to support its allegation that the estimate when

submitted was false and has not satisfied its burden of proof in this regard.

Finally, defendant asserts that several spreadsheet items in HKA’s December

13, 2005 claim, related to the estimated cost that HKA would have to expend for the

work site supervision involved in adding its January 25, 2005 proposal to the

contract, comprised falsities. (DPB 36-41, ECF No. 188; Tr. 1947-49, 1955, 1958.)

These items involve the estimates that 119 calendar days would be required to

perform the asserted additional work, the daily rate, mileage, and expenses to be paid

the work site superintendent and the G&A cost involved. Defendant’s counsel cross-

examined Richard Hernandez as to these estimates, but offered no other evidence that

the sums claimed comprised a “falsity.” (Tr. 317-357.) For example, cross-

examination as to the time HKA’s Superintendent Roland Hill worked prior to

Modification No. R00003, which HKA asserted added the work in its January 25,

2005 proposal to the contract, has no relation to the validity of HKA’s estimate in its

December 13, 2005 claim for 119 calendar days to perform, in the future, the asserted

newly-added work or the amount of superintendent time needed for this asserted

added work. No expert testified as to the invalidity of the estimates made. The cross-

examination of Richard Hernandez in no way provides the evidence needed to satisfy

defendant’s burden of proof as to a falsity with respect to the estimates involved. The

validity of HKA’s estimate cannot be judged by the work HKA performed after

December 13, 2005. The December 13, 2005 estimate included matters, that future

events, such as COE’s eventual acceptance of the modular building, as built, rendered

unnecessary to perform.

In addition to the “falsities” defendant asserts with respect to the CDA claim

estimates plaintiff submitted to the contracting officer, defendant’s counterclaim

(ECF No. 82, ¶¶ 53, 56, 60-65) also references HKA’s pretrial submissions of its

book and record accounting data in support of its de novo direct action claim to

recover the cost of supplying and installing the lights and cameras claimed to be

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added to the contract by Modification No. R00003. Defendant’s expert, George

Strickler, examined this pretrial data HKA submitted, including labor hour time

sheets, daily reports, meeting minutes/notes, etc. (JX 803.007.) From his

examination he developed charts questioning the allocation of certain labor hours

worked by Roland Hill, Richard Hernandez and Anne Hernandez to disputed trial

issues, such as the lights and cameras claim. (JX 803.022-.041; Tr. 2522-34.) In its

post trial briefing defendant addresses these allocation matters as damage issues and

does not include them in its fraud analysis. (DPB 22-25, ECF No. 188.) If liability

had been found for plaintiff’s lights and camera equitable adjustment claims, George

Strickler’s careful analysis of the record evidence in this regard would be given due

credit in determining damages. However, as discussed previously, HKA’s major

equitable adjustment claim has been rejected. If defendant is, contrary to the

indications in its briefing, asserting these allocation issues as another “falsity,” there

is a dearth of evidence pointing to a knowing false submission by HKA. Instead, as

noted, the material Strickler used to question certain allocations of booked labor

hours to claim items was also disclosed by HKA during pretrial proceedings. (JX

803.022.) HKA’s trial evidence on its equitable adjustment claim suffers from a

failure to coordinate adequately its booked labor cost entries with other recorded data

such as Contractor Quality Control Reports. (Id.) The trial evidence on damages

supports HKA ineptitude with respect to its accounting record analysis, not fraud.

In these circumstances, it is concluded that defendant has not met its burden

of proof under any of the three “fraud” statutes involved.

In this regard, defendant seeks recovery based on the CDA anti-fraud

provision, 41 U.S.C. § 7103(c)(2). Instead of its previous free-standing status as 41

U.S.C. § 604, this provision is now codified, more appropriately, as a part of CDA

section 7103 headed “Decision by contracting officer.” This anti-fraud provision

concerns a CDA claim(s) submitted to a contracting officer for a decision. The

provision states that

[i]f a contractor is unable to support any part of the contractor’s claim and it is

determined that the inability is attributable to a misrepresentation of fact or fraud by

the contractor, then the contractor is liable to the Federal Government for an amount

equal to the unsupported part of the claim plus all of the Federal Government’s costs

attributable to reviewing the unsupported part of the claim.

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Defendant predominantly targets HKA’s December 13, 2005 CDA claim for an

equitable adjustment to establish a basis for recovery under section 7103(c)(2). (DPB

35-46, ECF No. 188.)

The contracting officer denied plaintiff’s December 13, 2005 claim in its

entirety. (JX 217.) The contracting officer’s decision did not address any of the

spreadsheet estimates submitted by HKA with its December 13, 2005 claim, but

rested on a determination as to the contractual scope of work. In regard to applying

section 7103(c)(2), the contracting officer’s decision on HKA’s December 13, 2005

claim does result in a situation where “the contractor is unable to support any part of

the claim,” in this instance, the entire claim. The applicable regulation, concerning

contracting officer action, 48 C.F.R. § 33.209 provides:

If the contractor is unable to support any part of the claim and there is evidence that

the inability is attributable to misrepresentation of fact or to fraud on the part of the

contractor, the contracting officer shall refer the matter to the agency official

responsible for investigating fraud.

While there is no evidence in this matter that the contracting officer referred HKA’s

claim for investigation, the reference to the official responsible for investigating fraud

is required because the contracting officer has no authority to address fraud issues.

Martin J. Simko Constr., Inc. v. United States, 852 F.2d 540 (Fed. Cir. 1988); Medina

Constr., Ltd. v. United States, 43 Fed. Cl. 537, 554-56 (1999).

Accordingly, since there cannot be a contracting officer’s determination under

the CDA that the contractor’s inability to support any portion of its CDA claim is

attributable to a misrepresentation of fact or fraud, this determination must be made

by a tribunal having jurisdiction with respect to a government claim of contractor

misrepresentation of fact or fraud. This would be a United States District Court (28

U.S.C. § 1345) or, as in the instant case, the United States Court of Federal Claims

by means of a counterclaim filed in this de novo direct action litigation. 28 U.S.C.

§§ 1503, 2508; Martin J. Simko, 852 F.2d at 542. As noted previously, for the

government to prevail in attributing a contractor’s inability to support any particular

portion of its CDA claim to a misrepresentation of fact or fraud, the claim portion

involved and the attributable misrepresentation of fact or fraud must be proven by

preponderant evidence. Daewoo, 557 F.3d at 1335. In Daewoo, the contractor’s

project manager testified that “plaintiff filed at least $50 million of its certified claim

as a negotiating ploy.” Daewoo Eng’g & Constr. Co. v. United States, 73 Fed. Cl.

-48-

547, 570 (2006). The trial judge further found that “The Project Manager testified at

one point that Daewoo filed at least $50 million of the claim to indicate ‘the

seriousness of the situation,’ and to get the Government to ‘pay attention’ so it would

agree to a cheaper method of constructing embankments.” Id. at 585. Finally, in

reliance on this testimony, the court determined that the portion of the claim that

Daewoo was unable to support because of misrepresentation of fact or fraud was

$50,629,855.88 and so granted the government’s claim pursuant to 41 U.S.C. §

7103(c)(2) accordingly. Id. at 596-97. The Federal Circuit affirmed. 557 F.3d at

1338-40.

There is no evidence in the instant case similar to that in Daewoo.7/ Defendant

did not present evidence, as to the portion of HKA’s CDA claim estimates that HKA

would be unable to support, attributed to some specific misrepresentation of fact or

fraud. In the absence of such evidence, defendant has not met its burden of proof.8/

7/

This is despite several suggestions that HKA’s December 13, 2005 estimate could be

excessive. For example, while not addressing any spreadsheet component, the Contracting Officer’s

March 16, 2006 Decision noted “for argument’s sake,” “Installing parking lot lighting and security

cameras would not nearly double the dollar value of the entire contract.” (JX 217.017.) However,

HKA’s December 13, 2005 claim estimate covered considerably more than installing parking lot

lighting and security cameras, including sums addressing the possible modification or replacement

of the modular building. (JX 180.014.) Also, HKA’s October 25, 2005 letter seeking congressional

assistance contains the sentence, “The additional work which the Army Corps is trying to hold me

hostage is approximately $200,000 in construction value.” (JX 330.005.) However, in context, this

sentence could refer only to the value of the portion of the additional work that HKA would directly

perform, whereas the December 13, 2005 estimate included substantial sums for work by other

contractors.

8/

The anti-fraud provision of the CDA, 41 U.S.C. § 7103(c)(2), also provides that “Liability

under this paragraph shall be determined within 6 years of the commission of the misrepresentation

of fact or fraud.” HKA’s CDA claims at issue were submitted to the contracting officer in December

of 2005. (JX 180, 184, 189, 635.) The six-year period for determining liability expired in December

2011, prior to the completion of post trial briefing by the parties. (DPRB (Defendant’s Post Trial

Reply Brief) and PPRB (Plaintiff’s Post Trial Reply Brief), ECF Nos. 191, 192.) Recovery under

41 U.S.C. § 7103(c)(2) comprises a civil penalty. Daewoo, 557 F.3d at 1340. Under Gabelli v. SEC,

133 S. Ct. 1216, 1220-24, ___ L. Ed. 2d ___, ___ (2013), where the government is not suing to

recover a loss, but is enforcing a civil penalty, for statute of limitations purposes a fraud cause of

action begins to run when the fraud occurs, not when the government discovers it. Accordingly, it

would appear that recovery under 41 U.S.C. § 7103(c)(2) would be time barred in any event. In the

light of Gabelli, cases to the contrary which have relied on variations of the so-called “discovery

(continued...)

-49-

The circumstances involved with defendant’s counterclaims pursuant to 31

U.S.C. § 3729 and 28 U.S.C. § 2514 are similar to those with respect to 41 U.S.C. §

7103. In briefing, defendant equates HKA’s presentation as “[n]early a carbon copy

of the situation in which the court in O’Brien [O’Brien Gear & Machine Co. v.

United States, 219 Ct. Cl. 187, 591 F.2d 666 (1979)] held warranted forfeiture.”

(DPB 34, ECF No. 188.) However, O’Brien involved prior criminal fraud

convictions, forged test certificates, false checks, bribes, etc., all of which were

employed to deceive the government as to O’Brien’s true profit in a Renegotiation

Act matter. See O’Brien, 219 Ct. Cl. at 193, 198, 591 F.2d at 669, 672; McCarthy v.

United States, 229 Ct. Cl. 361, 373-78, 670 F.2d 996, 1003-07 (1982) abrogated on

other grounds by Slattery v. United States, 635 F.3d 1298 (Fed. Cir. 2011) (en banc).

There is no similar evidence in the instant case. No forged documents, bribes, false

checks or similar false records were produced. Defendant presented no viable

evidence that HKA’s CDA claim estimates were false and the “falsities” defendant

did assert have been shown not to be supported by the required preponderant

evidence to establish fraud, and clearly not by the enhanced burden of clear and

convincing evidence needed to support forfeiture.

A careful review of the testimony and documents presented in this case results

in the conclusion that defendant has not proven that HKA knowingly presented false

or fraudulent claims to the government.

In this circumstance, it is ORDERED:

1) Judgment shall be entered in favor of HKA in the sum of $10,921.20, plus

interest at the rate provided in 41 U.S.C. § 7104, on $1,555.20 of the judgment from

December 23, 2005 until payment, and on $9,366.00 of the judgment from May 3,

2006 until payment;

8/

(...continued)

rule” to extend the six-year bar of section 7103(c)(2) beyond six years, such as by commencing its

running upon discovery of the fraud, may no longer be valid. See UMC Elec. Co. v. United States,

45 Fed. Cl. 507, 508-09 (1999); Jana, Inc. v. United States, 34 Fed. Cl. 447, 452 (1995); SGW, Inc.

v. United States, 20 Cl. Ct. 174, 180-81 (1990).

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2) Except as granted in (1) all other claims pleaded in plaintiff’s First Amended

Complaint (ECF No. 10) are DENIED;9/ and

3) Judgment shall be entered in favor of HKA on defendant’s counterclaims.

s/ James F. Merow

James F. Merow

Senior Judge

9/

Plaintiff’s claim for prompt payment interest, pleaded in ¶¶ 14(b), 27, and 28 of the First

Amended Complaint (ECF No. 10) was dismissed by the Order, filed October 5, 2009. (ECF No.

64).

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