Government’s Notice That It Questioned Certain Costs and Would Take ‘Appropriate Action’ Is Not a Notice of ‘Disallowance’ as Required by the Contract: Contractor Granted Summary Judgment for Over $1 Million

CB&I Areva Mox Servs., LLC v. United States, 2018 U.S. Claims Lexis 1549 (November 9, 2018)

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Danielle J. Volpe

Nearly two decades ago, the Department of Energy, National Nuclear Security Administration (“NNSA”) awarded a contract for the design, construction and operation of a Facility at the Savannah River Nuclear Site (‘the Contract”) to Mox Services’ (“Mox’s”) predecessor in interest, Duke, Cogema, Stone & Webster, LLC.  Mox has no employees and subcontracts out the entirety of its work under the Contract to subcontractors.  CB&I Project Services Group (“CPSG”), Mox’s parent company, was the principal subcontractor.  The Contract followed a “cost reimbursement” model whereby NNSA would pay Mox for certain allowable costs that Mox incurred in performing the Contract.

In 2015, CPSG began an employee “re-slotting” process where CPSG changed its employees titles and, in some cases, their compensation.  During this process, CPSG put nearly all of its non-craft workforce (roughly 863 employees) into new positions.  Of the 863 employees, 55 received salary increases.  CPSG increased its billing rate for these 55 employees.  Mox did not specifically notify NNSA about this re-slotting and increase, but instead provided the increased billing rates to NNSA as part of its pay requisitions.  In April 2016, upon realizing the increase, NNSA notified Mox that the information it provided to justify the salary increase was insufficient and requested additional information, and warned it would take “appropriate action” to protect itself.  The NNSA later withheld 2% of the total direct non-craft labor expenses –$1,142,112.00.

Under the Contract’s disallowance procedure, prior to any withholding, NNSA and the contractor were required to hold informal discussions and then, if those are unsuccessful, the NNSA is to provide the contractor with written official notice of its intent to disallow the disputed amount.  This written official notice must state the amount being disallowed, and can be issued before the disallowance or at the time the deduction is made.

On March 1, 2016, upon the NNSA’s request, Mox submitted certified payrolls to NNSA for payment of the withheld funds.  After NNSA denied Mox’s claim, Mox appealed to the Federal Court of Claims.

On appeal, Mox argued that it was entitled to partial summary judgment on its claim for increased costs because the NNSA failed to issue a sufficient written notice, as required under the Contract’s disallowance procedure, notifying Mox of the NNSA’s intent to withhold costs pending further investigation.  The NNSA argued that it did provide sufficient notice in writing when it requested that Mox forward additional information to support its claim or it would take “appropriate action” to protect its interests.  The Court agreed with Mox that the NNSA failed to follow the Contract’s disallowance procedure, and that the written notice of the NNSA’s intent to “protect its interests” fell short of the contractually-required notice and did not contain the elements that the notice must include to permit the disallowance.

As a result, the Court granted summary judgment in favor of Mox for the $1,142,112 improperly withheld and remanded the matter back to the NNSA to consider Mox’s other claims.

To view the full text of the court’s decision, courtesy of Lexis®, click here.