[Federal Register Volume 61, Number 65 (Wednesday, April 3, 1996)]
[Notices]
[Pages 14762-14766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8171]
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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
