Contractor Litigation Costs Policies; Policies, Terms of Law Firm Engagement, and Allowability of Costs

DEPARTMENT OF ENERGY

Office of Procurement and Assistance Management

Contractor Litigation Costs Policies; Policies, Terms of Law Firm

Engagement, and Allowability of Costs

AGENCY: Department of Energy.

ACTION: Notice of interim policy statement.

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SUMMARY: The Department of Energy today publishes an interim

Acquisition Letter for public comment that has been issued to

contracting officers who are responsible for the administration of

management and operating contracts. The letter sets forth interim

policies regarding two contract clauses that are prescribed by the

Department of Energy Acquisition Regulation. The letter sets forth a

statement of policy with regard to the terms of engagement that should

be a condition of any authorization to a current or former management

and operating contractor to engage a law firm to defend a lawsuit. The

letter also sets forth policies for a contracting officer's

consideration in determining whether particular litigation costs are

reasonable and therefore allowable.

DATES: The effective dates are set forth in the interim Acquisition

Letter. Comments are due on or before September 30, 1994.

ADDRESSES: Comments may be submitted to Marc Johnston, Deputy General

Counsel for Judicial Litigation, U.S. Department of Energy, Washington,

DC 20585.

FOR FURTHER INFORMATION CONTACT: Marc Johnston, Deputy General Counsel

for Judicial Litigation, U.S. Department of Energy, Washington, DC

20585 (202) 586-2909.

SUPPLEMENTARY INFORMATION: The Department of Energy (Department) owns

facilities in various locations in the United States which have been

operated by former and current management and operating contractors. In

connection with these facilities, there is a substantial amount of

litigation against which the Department may elect to defend itself or

authorize the contractor to defend. The standard provisions of

management and operating contracts allow contracting officers to

authorize contractors to engage lawyers to defend lawsuits, subject to

such conditions as the contracting officers deem appropriate. See 48

CFR 970.5204-31. The standard provisions of management and operating

contracts also authorize contracting officers to determine whether the

costs charged are reasonable and therefore allowable when allocable to

contract work. See 48 CFR 970.5204-13.

Recently, the Department has experienced unacceptably high

litigation costs from management and operating contractors in

connection with the defense of lawsuits where the Department has

elected to have the contractor engage lawyers to conduct the

litigation. Moreover, contracting officers dealing with these costs

have differed in their approaches to determining whether a litigation

cost is reasonable. The Department has an urgent need to provide for a

more uniform approach by contracting officers to such costs and to stem

payment of unreasonable expenses. This need is particularly compelling

in light of the substantial dollar amounts at stake and the

Department's budgetary situation. In view of the foregoing, the

Department has issued the Acquisition Letter set forth below as an

interim policy, the effective dates of which are set forth below. The

Department will receive and consider public comment prior to issuing a

final version of this Acquisition Letter.

The provisions of the policy are largely self-explanatory. They are

based on past experience of the contractors, the Department of Energy,

and other federal agencies (including the Federal Deposit Insurance

Corporation and Resolution Trust Corporation) in managing and

controlling litigation costs throughout the Nation, and should provide

a reasonable decisionmaking framework for contracting officers without

being unnecessarily constraining. If any of the provisions of the

policy would be unreasonable as applied, contracting officers have

discretion to depart from the policy based upon particular facts and

circumstances.

The Department is seeking public comment on the interim Acquisition

Letter in order to give the public, including those persons who are

affected by the policies, an opportunity to comment on the interim

Letter before it is finalized.

Issued in Washington, DC, on August 26, 1994.

Richard H. Hopf,

Deputy Assistant Secretary, Office of Procurement and Assistance

Management.

Acquisition Letter 94-13, August 25, 1994.

Authority: This Acquisition Letter (AL) is issued by the

Procurement Executive pursuant to a delegation from the Secretary

and under authority of the Department of Energy Acquisition

Regulation (DEAR) Subpart 901.301-70.

Contents

Citation Title

970.5204-13..... Allowable costs and fixed-fee (Management and

Operating Contracts)

970.5204-31..... Litigation and claims

I. Purpose

The purpose of this AL is to establish interim policies on the

reasonableness of Management and Operating (``M&O'') contractor

litigation costs.

II. Background

Under the allowable costs clause of the Department's M&O contracts,

attorneys' fees and other litigation costs are allowable only if

reasonable and incurred in accordance with the Litigation and claims

clause. The policies set forth below are a prospective reference to aid

in Contracting Officers' determinations as to whether contractor

litigation costs under M&O contracts are reasonable.

The Department recognizes that these policies can be most

effectively achieved for pending cases through the cooperation of the

contractors and the law firms involved. The Department intends to work

closely with the contractors to ensure a smooth implementation that

will not compromise the defense of pending matters.

III. Guidance

These policies apply to reimbursement of present and former M&O

contractors for amounts paid to outside law firms and consultants

(``outside firms'') in connection with litigation to which the

contractor is a party, except to the extent the contractor's own

litigation procedures or current retainer agreements contain more cost-

restrictive provisions. The Contracting Officer, or his or her

designated representative (hereinafter ``Contracting Officer''), may,

after consultation with Department counsel, authorize an exception to

the policies described below based upon economy, the interests of the

Government, or other good cause. These policies may be modified, from

time to time, as the Department determines appropriate. The Contracting

Officer has authority to exclude from these policies cases whose

expected costs of defense are less than $25,000 and/or routine matters

handled by outside counsel retained and supervised by an insurance

carrier.

A. Interim Policies

Contracting Officers shall refer to and consider the following

policies in determining the reasonableness of contractor litigation

costs. The failure to specify or describe a particular category of cost

in paragraphs III.A.1. through III.A.10. does not imply that such

category of cost is either allowable or unallowable.

1. Terms Of Engagement

In order for costs incurred by an M&O contractor for an outside

firm to be considered reasonable, they shall be incurred in accordance

with the terms of engagement between the contractor and the outside

firm which have been approved by the Contracting Officer. The terms of

engagement between the contractor and the outside firm shall

incorporate and include the policies included in paragraphs III.A.1.

through III.A.10. of this AL. The terms of engagement shall also

provide that the outside firm will comply with the Department's

Litigation Management Procedures, which, among other things, require a

Staffing and Resource Plan (for significant cases), periodic case

assessments and budgets, adequate audit provisions, and notification to

the Department and the contractor of any significant change in the

Staffing and Resource Plan.

a. Bills and invoices. All bills and invoices shall reflect the

information and contents set forth in the model format of Attachment A.

Any bill or invoice shall also contain a certification signed by a

representative of the outside law firm to the effect that:

``Under penalty of law, [the representative] acknowledges the

expectation that the bill will be paid by the contractor and that the

contractor will be reimbursed by the Federal Government through the

U.S. Department of Energy, and, based on personal knowledge and a good

faith belief, certifies that the bill is truthful and accurate, and

that the services and charges set forth herein comply with the terms of

engagement and the policies set forth in [this Acquisition Letter], and

that the costs and charges set forth herein are necessary for the

litigation.''

b. Audit. All terms of engagement must contain a provision for

auditing expenditures under the terms of engagement to determine and

ensure compliance with the terms of engagement and the provisions of

the prime contract, and to determine the accuracy of any bill or

invoice for the services of the outside firm. The provision shall

include a statement that:

[The outside firm] expects that the costs of the services

rendered under the terms of engagement will be paid by the contractor

and that the contractor will be reimbursed by the Federal Government

through the U.S. Department of Energy.

[The contractor] and the Department of Energy, its

designated representative, and the General Accounting Office, have the

right upon request, at reasonable times and at reasonable locations, to

inspect, copy, and audit all records documenting billable fees and

costs under the terms of engagement, the systems employed by [the

outside firm] to capture, record, and bill the fees and costs, and any

other records relevant to the representation by the outside firm under

the terms of engagement.

[The outside firm] will retain all such records for a

period of three (3) years after the final payment under the terms of

engagement.

The provision does not constitute a waiver of any

applicable legal privilege, protection, or immunity with respect to

disclosure of these records to third parties.

2. Fees

In determining whether fees or rates charged by an outside firm are

reasonable for purposes of approving a contractor's terms of engagement

with an outside firm, the Contracting Officer shall consider whether

the contractor sought the lowest reasonably achievable fees or rates

(including any currently available or possibly negotiable discounts)

from the outside firm, whether the contractor considered rates

available from other firms providing comparable services, and whether

the contractor considered alternative rate structures such as flat,

contingent, and other innovative proposals.

3. Profit And Overhead

The rate or fee structure shall include all outside firm

``overhead'' and ``profit,'' and, therefore, any additional overhead or

profit charged by the outside firm shall be considered unreasonable.

Similarly, any markups by the outside firm for supplies or services

procured from third parties would be unreasonable. For instance, only

the actual costs of messenger services shall be allowed, whether the

service was performed by the outside firm or a third party.

Additionally, any interest the contractor incurred on any outstanding

(unpaid) bills from outside firms is not reimbursable under the DEAR.

4. Travel and Related Expenses

Charges for air travel shall be the actual cost, not to exceed the

coach class fare. Charges for local ground travel shall be the actual

cost of the taxi service, or the existing Internal Revenue Service's

mileage deduction allowance if the person drives his or her own

automobile. Charges billed for meals, lodging and rental cars must be

moderate. The rates set forth in the Federal Travel Regulations will be

deemed presumptively reasonable. See 41 CFR ch. 301. Charges for luxury

hotels, cars, or services such as movies and fitness facilities are

neither necessary nor reasonable.

Travel by more than one person from an outside law or consulting

firm to attend a deposition, court hearing, interview, or meeting

outside the person's home office shall not be considered reasonable

except when authorized by contractor counsel in accordance with

procedures agreed upon with Department counsel.

Any travel time may be reimbursed at a full rate for the portion of

time during which the outside firm performs work for the contractor.

For air travel, any remaining travel time during normal working hours

shall be reimbursed at 50 percent. In no event is travel time for time

during which work was performed for other clients reimbursable.

5. Copying

Copying charges shall not exceed ten cents a page, unless supported

by a cost study and approved in advance by the Contracting Officer.

Copying projects where volume would generate substantial savings should

be sent to outside vendors when practicable and cheaper. As with costs

for all supplies and services, the Contracting Officer should look to

local commercial rates as a benchmark.

6. Telephone Charges and Faxes

Charges billed for toll or long distance calls, including

facsimile/telecopier transmissions, shall not exceed the actual charge

for each call, with no overhead or surcharge adjustment.

7. Computer Time

Charges for computer-assisted research shall not exceed the actual

cost, with no overhead or surcharge adjustments.

8. Overtime and Certain Temporary Employees

Secretarial and clerical overtime or costs of temporary support

personnel billed by the outside firm shall not be charged, unless the

Contracting Officer approves such overtime or temporary support

personnel or the cost is caused or required by an emergency situation

not of the contractor or the outside attorney's making. Time charged by

summer associates should be scrutinized for its efficiency and

consistency with the Staffing and Resource Plan.

9. Experts Employed by DOE Contractors

If the contractor or outside counsel wishes to retain as a

consultant in a matter an employee of another contractor of the

Department of Energy, the requesting contractor must receive prior

approval from the Department of Energy, which will attempt to furnish

the expert directly through the contractor that currently employs the

potential consultant. This policy does not alter any applicable

provisions of the prime contract with either the requesting or the

employing contractor.

10. Specific Non-reimbursable Costs

The contracting officer shall not consider for reimbursement any

proposed costs by the contractor for any direct costs incurred by

outside firms for the following items: entertainment; alcoholic

beverages; secretarial or clerical support time (except as provided

under paragraph 8, above); word processing; computers or general

application software; client development and related activities; trade

publications, books, treatises, background materials, and other similar

documents; professional/educational seminars and conferences;

preparation of bills; parking fines or any other fines or penalties for

illegal conduct; and food, beverages and the like when the attorney or

consultant is not on travel status and away from the home office. An

exception may be made, however, for reasonable expenses for working

meals during an in-house meeting not in excess of $10 per person. No

outside firm's bills are to contain any items representing

disbursements made for the benefit of the contractor's employees, such

as meals or lodging for contractor's current personnel (other than

conference meals at which contractor personnel are present under this

paragraph).

IV. Effective Dates

These policies are effective with respect to determinations of

reasonableness and allowability of costs for services rendered and

expenses incurred:

1. on or after October 1, 1994, for all class actions;

2. on or after November 1, 1994, for all non-class actions

commenced on or after October 1, 1994; and

3. on or after February 1, 1995, for all non-class-action

litigation commenced before October 1, 1994.

V. Expiration Date

The Department is seeking public comment on these policies. This AL

will remain in effect on an interim basis until the Department takes

further action after reviewing any public comments on these policies.

Attachment A.--U.S. Department of Energy, Office of General Counsel, Contractor Litigation Costs, Model Bill Format and contents

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I. FOR FEES

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Name or initials of Amount (rate x

Date of service Description of service attorney Approved rate Time charged time)

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(See Note 1 below).

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II. FOR DISBURSEMENTS

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Date Description of disbursement Amount

(See Note 2 below).

Note 1.--Description of Service: All fees must be itemized and described in sufficient detail and specificity to

reflect the purpose and nature of the work performed (e.g. subject matter researched or discussed; names of

participants of calls/meetings; type of documents reviewed).

Note 2.--Description of Disbursement: Description should be in sufficient detail to determine that the

disbursement expense was in accordance with all applicable DOE policies on contractor litigation costs and the

terms of engagement between the contractor and the law firm (e.g. if copying charges, include number of pages

copied and cost per page).

[FR Doc. 94-21536 Filed 8-30-94; 8:45 am]

BILLING CODE 6450-01-P