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

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DEPARTMENT OF ENERGY

Contractor Litigation Cost Policies; Policies, Terms of Law Firm

Engagement, and Allowability of Costs

AGENCY: Department of Energy.

ACTION: Notice of final policy statement.

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SUMMARY: The Department of Energy today publishes a final policy

statement that was issued in interim form in an internal Acquisition

Letter giving policy guidance to contracting officers. This policy

statement sets forth policies regarding two contract clauses that are

prescribed by the Department of Energy Acquisition Regulation (DEAR).

The policy statement sets forth a statement of policy regarding the

terms of engagement that should be a condition of any contracting

officer's authorizing a current or former management and operating

(M&O) contractor to engage a law firm to defend a lawsuit. The policy

statement also sets forth policies for a contracting officer's

consideration in determining whether particular litigation costs are

reasonable and allowable.

EFFECTIVE DATE: May 3, 1996.

FOR FURTHER INFORMATION CONTACT: Lisa Schiavo Blatt, Assistant General

Counsel for Contractor Litigation Reform, U.S. Department of Energy,

Washington, DC 20585 (202) 586-5281.

SUPPLEMENTARY INFORMATION: The Department of Energy (Department) owns

facilities in various locations in the United States which have been

operated by former and current M&O contractors. In connection with

these facilities, there is a substantial amount of litigation against

which the Department may elect to defend the contractor or authorize

the contractor to defend. The standard provisions of M&O 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 M&O contracts also authorize contracting officers to

determine whether the costs charged are reasonable and allowable. See

48 CFR 970.5204-13.

In recent years, the Department experienced unacceptably high

litigation costs from M&O contractors in connection with the defense of

lawsuits where the Department elected to have the contractor engage

lawyers to conduct the litigation. Moreover, contracting officers

dealing with these costs differed in their approaches to determining

whether a litigation cost was reasonable. The Department had an urgent

need to promote a more uniform approach by contracting officers to such

costs and to stem payment of unreasonable expenses. This need was and

will continue to be particularly compelling in light of the substantial

dollar amounts at stake and the Department's budgetary situation.

As a result, on August 31, 1994, the Department published an

interim Acquisition Letter as an interim policy in the Federal Register

(59 FR 44981). The interim Acquisition Letter was issued to contracting

officers responsible for administering M&O contracts and set forth the

Department's policies for contracting officer's consideration regarding

the interpretation and application of two clauses prescribed by the

DEAR. The interim Acquisition Letter established the Department's

policy that should prove to be reasonable in most circumstances

regarding the terms of engagement that should be a condition of any

authorization to a current or former M&O contractor (or any contractor

who may have or had a Department of Energy contract containing a

``Litigation and Claims'' clause) to engage a law firm for purposes of

litigation. The interim Acquisition Letter also established policies

for a contracting officer's consideration in determining whether

particular litigation costs are reasonable and allowable.

The provisions of this policy statement are largely self-

explanatory. They are based on past experience of the contractors, the

Department, 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 this

policy statement would be unreasonable as applied, contracting officers

have the discretion to depart from the policy based upon particular

facts and circumstances.

The Department sought 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

Acquisition Letter before it was finalized. Comments on the notice of

interim policy were required to be received on or before September 30,

1994. The Department received comments from only one commenter. The

Department reviewed the comments and has determined to finalize the

interim policy in the August 31, 1994, Acquisition Letter with some

minor modifications as described below.

The commenter suggested that the Department combine the guidance

provided in the interim Acquisition Letter with earlier guidance issued

by the Department entitled ``Litigation Management Procedures''

(referred to by the commenter as ``Management of Litigation

Activities'') and publish the combined procedures for review and

comment. The commenter claimed that there were significant differences

between the two documents and argued that the existence of two

documents on the subject of contractor litigation makes it unclear

which terms of engagement are binding on M&O contractors.

While there may be some merit to having one comprehensive document

addressing contractor litigation procedures, the Department does not

believe that the guidance provided in the two documents is conflicting

or confusing because they address different topical areas. The earlier

document on litigation management provides guidance to the Department's

contracting officers and M&O contractors on the development of

contractor litigation procedures such as a Staffing and Resource Plan.

The interim Acquisition Letter provided guidance to the Department's

contracting officers in determining the reasonableness of contractor

litigation expenses and related terms of engagement. However, the

Department will continue to review the effectiveness of its litigation

management policies and cost guidelines and will work to consolidate

and streamline procedures if warranted.

The commenter questioned whether the policy on contractor

litigation costs could be implemented by the issuance of an Acquisition

Letter. The commenter pointed out that the Department does not have the

right to modify a contract unilaterally.

The Department disagrees with the commenter's position that a

bilateral contract modification is necessary to implement or modify the

provisions of the interim Acquisition Letter or this policy statement.

The interim Acquisition Letter, now finalized as a policy statement,

does not constitute a unilateral contract modification, but rather a

set of non-binding uniform and consistent guidelines to assist

contracting officers in determining the reasonableness of litigation

costs, which they are required to do under 48 CFR 970.3101-3.

Contracting officers may authorize exceptions to the policies set forth

in the policy statement based upon ``economy, the interests of the

Government, or other good cause.'' If a

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contractor were to contest a contracting officer's adverse

determination on allowability of costs or terms of engagement

consistent with the policy statement, the Department would have to

defend those determinations on the merits under the terms of applicable

contract clauses.

The commenter suggested that the Department should not require

contracting officer approval on a case-by-case basis of the terms of

engagement between the contractor and an outside firm. Instead, once a

contractor's litigation management policies have been approved by the

Department, all costs incurred consistent with the approved system

should be allowable.

The Department believes that case-by-case review of contractor

agreements with outside law firms is necessary to ensure effective

control of contractor litigation costs. This need is particularly

compelling in light of the substantial dollar amounts at stake and the

Department's budgetary constraints.

The commenter recommended that the Department modify 48 CFR 970.71,

``Management and Operating Contractor Purchasing,'' to incorporate

provisions governing the terms of engagement with outside law firms,

since these are, in effect, contracts for services. However, the

Department is disinclined at this time to codify this policy statement

in the Department of Energy Acquisition Regulation. As the Department

gains experience with the guidance provided in this policy statement

and with the implementation of its Litigation Management Procedures, it

will consider whether and to what extent the provisions of these

documents should be codified in the DEAR.

Finally, the commenter characterized as ``confusing'' the statement

in section III.A. of the interim Acquisition Letter that failure to

specify or describe a particular category of costs does not imply that

such category of costs is either allowable or unallowable. However, the

commenter did not provide any example to illustrate why the statement

was ``confusing.'' The statement in Section III.A. is essentially a

quotation from the Department's standard allowable cost clause. See 48

CFR 970.5204-13(c). The purpose of the statement, also contained in

this policy statement, is to reiterate to contractors that costs not

identified as specifically allowable or unallowable are still subject

to the general rules of allowability, reasonableness, and allocability.

Since the statement points out to contractors that an existing standard

clause applies to litigation costs and procedures, the Department

believes no further clarification is necessary.

Issued in Washington, D.C. on March 22, 1995.

Richard H. Hopf,

Deputy Assistant Secretary for Procurement and Assistance Management.

Final Policy Statement:

Management and Operating Contractor Litigation Costs

I. Purpose

The purpose of this policy statement is to establish final 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. Final 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 policy statement. 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 the Department of Energy

policy statement on contractor litigation, 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:

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[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 and 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

Department of Energy Acquisition Regulation.

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 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 Department of Energy 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;

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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.

Attachment A. -- U.S. Department of Energy, Office of General

Counsel, Contractor Litigation Costs, Model Bill Format and

Contents

I. FOR FEES

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Name or

Date of service Description initials of Approved rate Time charged Amount (rate x

of service attorney 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

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(See Note 2 below)................... ...............

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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. 96-8171 Filed 4-2-96; 8:45 am]

BILLING CODE 6450-01-P