Congress enacted the Contract Disputes Act of 1978 (CDA)[1] to “provide a fair, balanced, and comprehensive statutory system of legal and administrative remedies in resolving government contract claims.”[2]  But for many involved in public construction projects, the CDA does not always feel like a fair or comprehensive scheme for resolving disputes caused by the acts or omissions of the Government.  In particular, subcontractors and suppliers are barred by principles of sovereign immunity from suing procuring agencies directly where Government representatives impact, delay, or increase the cost of the work.[3]  Because subcontractors and suppliers lack privity with the agency, their recourse for Government interference is limited to “pass-through” or “sponsored” claims, which hinge on the general contractor’s willingness to take up the torch on their behalf.[4] 

For decades, procuring agencies have turned to the Severin doctrine as a defense to pass-through claims.  The Severin doctrine precludes the general contractor from prevailing on a pass-through claim where exculpatory language in its subcontract absolves it of any liability to the impacted subcontractor.[5]  The Severin doctrine is, at its core, the Government’s attack on the last prong of any claim for breach of contract, i.e. damages.  If the general contractor has no actual or potential liability to its subcontractor, the logic goes, then it has no out-of-pocket damages for which it can seek recompense from the Government.  While seemingly unfair and confusing, judges continue to deny otherwise valid claims against the Government, citing the Severin doctrine and the related need for strict construction of sovereign immunity waivers.[6]

To insulate themselves from the Severin defense, federal contractors often enter into liquidating agreements with their subcontractors prior to certifying any pass-through claim.  A liquidating agreement is essentially a settlement, the purpose of which is to define and consolidate any pass-through claims that are vulnerable to a Severin defense and ratify the scope of the general contractor’s liability to the subcontractor for all such claims.  This Article discusses the key provisions of any liquidating agreement which, if optimally drafted, can benefit both the contractor claimant and the affected subcontractor.

What the Government Must Prove to Prevail on the Severin Defense

The Severin doctrine is an affirmative defense.  Accordingly, “the burden is on the government to prove that the prime contractor is no longer liable to its subcontractor on the pass-through claim.”[7]  Like any affirmative defense, the Severin doctrine must be pled or otherwise argued by the Government at or before the trial or administrative hearing.  The Government’s failure to timely raise the Severin defense may be construed as a waiver, which converts the pass-through claim to a permissible direct claim under the prime contract.[8]

The Government cannot meet its burden of proof on the Severin defense by merely suggesting that a pass-through claim is questionable, or even partially barred, by some provision in the subcontract.  Rather, the Severin defense requires “an iron-bound release or contract provision immunizing the prime contractor completely from any liability to the sub.”[9]  In other words, the Government must show that the general contractor is “completely exonerated” against the subcontractor’s claim.[10]  Even where the Government meets its initial burden, the CDA claimant may overcome the Severin defense by putting on evidence that it remains liable to the subcontractor for the damages asserted in the claim.[11]

Three Common Scenarios in Which the Government Argues Severin

Contractors utilize a number of mechanisms to protect themselves against subcontractor claims and shift risk to subcontractors for Government default or interference.  When it comes time to assert pass-through claims, safeguards in the subcontract can become a double-edged sword on which the agency may rely to deny a claim.  The three most common situations in which the agency asserts Severin for claims arising under a construction contract include: (1) the no-damages-for-delay clause; (2) subcontractual language in the disputes resolution clause, and; (3) waiver language in the subcontractor’s payment applications, change orders, and releases.

Two caveats of the Severin doctrine are worth noting.  First, while federal procurement contracts are governed by federal common law and the Federal Acquisition Regulation (FAR),[12] subcontracts are typically governed by the law of the state in which the project is located.  Thus, whether or not a subcontract provision creates an “iron-bound” release or enforceable exculpatory clause may depend on the governing principles of state law, as well as the presiding judge’s forecast of how the highest state-level court would decide the issue.  For example, in Harper/Nielsen-Dillingham, the Court of Federal Claims forecasted that the California Supreme Court would enforce a no-damages-for-delay clause in a federal subcontract, which effectively barred any pass-through claim for delay damages.[13]

Second, the general contractor may argue that it has potential liability to the subcontractor even where it has denied such liability in a pending litigation or arbitration filed by that subcontractor.  This scenario most frequently arises when the subcontractor is compelled by statutory (such as the federal Miller Act[14]) or contractual time limits for asserting claims.  Answers and arbitration pleadings denying liability for subcontractor damages do not, in a subsequent CDA pass-through action, defeat the claim, though such denials may be offered by the agency as evidence undermining the pass-through claim.[15]

No-Damages-for-Delay Clause

The no-damages-for-delay clause disclaims or limits the general contractor’s liability for additional direct and indirect costs the subcontractor suffers as a result of delays to project completion.  As it pertains to monetary damages, the no-damages-for-delays clause may be absolute or conditional.  The subcontract may state that a time extension is the “exclusive remedy” for delays to the contractual completion date, in which case the general contractor is ostensibly relieved of any obligation to reimburse the subcontractor for delay damages.  In the alternative, the subcontract may authorize delay damages “to the extent that contractor recovers from the owner.”[16]  This more moderate variant leaves open an avenue for subcontractor recovery for delay, assuming the Government is responsible for the impacts to project completion.

In all but three states, no-damages-for-delay clauses are enforceable between private parties as long as the operative language is clear and unambiguous.[17]  Nevertheless, general contractors facing the Severin defense may argue that their own subcontract language is unenforceable based on statute, regulation, public policy of the state, or some other basis for invalidating the provision.  For the most part, boards of contract appeals have rejected attempts to abrogate the no-damages-for-delay language where the clause releases the general contractor unconditionally for delay claims.[18]

Disputes Resolution Clause

General contractors tend to use standard form subcontracts that, like the no-damages-for-delay clause, limit the subcontractor’s recovery on any claims for which the Government is partly or wholly responsible.  Disputes resolution clauses commonly restrict the subcontractor’s recovery for owner-caused changes to the actual damages the prime contractor recovers from the agency in relation to the subcontractor’s work.  These clauses may place further restrictions on the subcontractor’s ability to recover for damages for which the subcontractor is partly or concurrently responsible.  Additionally, the general contractor may negotiate protections regarding responsibility for prosecuting claims and appeals, paying costs and attorneys’ fees, sharing information and cooperating in the pursuit of claims, and indemnity for Government counterclaims or false statements.

The dispute resolution process for pass-through claims is different than that for ordinary prime contractor claims under the CDA.  While the CDA requires certification of any claim in excess of $100,000, the Federal Circuit has held that the prime contractor may submit pass-through claims to the agency where the prime believes there is a “good ground” for the claim.[19]  Thus, the general contractor’s role as shepherd of a pass-through claim is not to decide the ultimate resolution of the claim, but to vet for a legitimate basis for presenting it to the contracting officer.[20]

Assuming the Government denies the pass-through claim, what are the options for prosecuting an appeal?  In most subcontracts, the disputes resolution provision authorizes the general contractor to either conduct the appeal on the subcontractor’s behalf or allow the subcontractor to bring it in the general contractor’s name.  In either instance, the general contractor’s liability to the subcontractor is usually limited to whatever actual damages it ultimately recovers from the contracting agency.

Where the disputes resolution clause so provides, the prime contractor may avoid the Severin defense simply by fulfilling its obligations to appeal an adverse decision.  For example, in TAS Group, the Department of Transportation Contract Appeals Board (DOTCAB) rejected the Severin defense as applied to a federal lessee that had no financial interest in prosecution of claims against the agency.[21]  On behalf of its aircraft maintenance subcontractor (CSI), TAS submitted a pass-through claim for damage to an aircraft engine caused by employees of the Government.  The agency asserted the Severin defense, citing a subcontract provision making CSI responsible for all liabilities arising out of the subcontract.  The board rejected the Severin defense, citing to a separate subcontract requirement that TAS pursue claims against the Government “to the maximum extent possible.”  Unable to reconcile the obligation to pass through claims with the apparent waiver of liability, the board concluded that a “prime contractor may maintain an action [under the CDA] even if its liability to the subcontractor is extinguished merely by prosecuting the subcontractor’s claims against the government or paying over to the subcontractor any recovery obtained from the government.”  The board further noted that “the obligation to cooperate in the prosecution of a subcontractor’s suit is generally sufficient to preclude the application of the Severin doctrine.”[22]

Release Language in Payment Applications and Change Orders

The Government has frequently argued that boilerplate release language in a subcontractor’s payment applications, bilateral subcontract change orders, or mutual release forms constitutes a waiver of claims arising during the relevant pay period.  Absent an express carve-out of claims against the agency, judges have applied Severin to claims that are the subject of unequivocal (i.e., “iron-clad”) releases.  This line of decisions highlights how important it is for contractors to scrutinize the fine print in project records and reserve any open subcontractor claims for which the Government is even partially responsible.

In Freedom Systems, LLC, the Armed Services Board of Contract Appeals (ASBCA) held that the Severin doctrine barred a pass-through claim where the sponsored subcontractor executed a broad-form release against the general contractor and failed to carve out any exception for claims against the government.[23]  Because the subcontractor had “fully and unconditionally released appellant from any and all claims related to this contract,” the ASBCA relieved the Government of any liability.  The Board noted that the language in the release provision contained no qualifications or conditions and was freely given by the subcontractor with no “inducement.”[24]

In Acquest Government Holdings, the GSA argued that the Severin doctrine barred a pass-through claim submitted by its leaseholder, Acquest, which had contracted with Colorado Jaynes Construction (CJC) for improvements to a wildlife research facility.[25]  Acquest claimed that CJC suffered $3 million in delay damages due to design changes issued by GSA.  Arguing that Severin precluded the claim, GSA relied on CJC’s execution of a final subcontract change order stating:

The following change order covers all issues known and unknown between Acquest and Colorado Jaynes but, excludes all claims as shown on the [Proposed Change Order] Log that are claims against the original documents and specifications provided for the purpose of estimating the project.  The P.C.O. Log represents items to be claimed against the NWRC, GSA and the Government.  This change order represents full and final payment for all issues outstanding between Acquest and Colorado Jaynes but excludes issues claimed against the GSA/NWRC and the Government which Acquest will not have any further liability for.[26]

Acquest subsequently certified a CDA claim for $2.3 million, which was denied by GSA and appealed to the Civilian Board of Contract Appeals (CBCA).

Denying the GSA’s motion for summary judgment, the CBCA observed that the “post-Severin direction has been for the doctrine to be construed narrowly.”[27]  The CBCA construed the change order language to limit the intended release to claims that arose between the parties and carve out claims against the agency.  The board also noted that a subsequent joint prosecution agreement obligated Acquest to pursue and cooperate in the presentation of claims on behalf of the CJC.  The evidence supported a finding that, in agreeing to any release language, Acquest “was only trying to protect itself against liability for damages beyond those it could successfully prove were Government-caused.”[28]

Liquidating Agreements are the Antidote to Severin

Government contractors have found the antidote to the Severin defense in the form of “liquidating agreements,” which are also known as “joint prosecution,” “common interest” or “pass-through” agreements.  Liquidating agreements are a means of expediting claim prosecution on behalf of subcontractors while maintaining bargained-for limitations on the general contractor’s exposure. As such, they require balancing the subcontractor’s right to additional compensation with the general contractor’s interest in protecting and preserving its relationship with the agency.  Stuck in the middle of an impacted subcontractor and a valued business partner, the general contractor must consider several issues before submitting a certified claim under the CDA.  The key features of a sound liquidating agreement are discussed below.

Identify All Government-Caused Claims that the Subcontractor Seeks to Pass Through to the Agency

Because the work of trade subcontractors often depends on the timeliness and quality of other trades, major scope changes, interferences, or informational delays by the Government are likely to have a trickle-down effect on multiple subcontractors.  The resultant claims can come in many different forms (changes, suspensions, delays, labor inefficiency, cumulative impact); may be pursued under competing theories of recovery (constructive change, constructive suspension, acceleration, differing site condition, breach of contract); and involve unique elements of proof and damages (direct labor and material costs, supervision, extended or unabsorbed overhead, bonding and insurance costs, etc.).

The first step for any general contractor charged with formulating a liquidating agreement is to inventory every claim that can be characterized as owner-related.  Submitting all claims to the Government at once is far more advantageous than piecemeal claims prosecution, which can occur when a subcontractor decides to amend, supplement, or alter its claim after it goes to the contracting officer.  Nothing muddies a CDA appeal and hurts the claimant’s credibility on a pass-through claim more than when a subcontractor changes its factual grounds for relief, increases or modifies its damages, or adds new theories into the mix after claim submission.  In some cases, modifications will be considered to give rise to a “new claim” that requires a reset of the 60-day review and decision period under the CDA.[29]  This can be costly in terms of the time and legal fees needed to re-shape the claim and comply with jurisdictional requirements under the CDA.

The general contractor and subcontractor need to be unified before submitting a pass-through claim.  This means first identifying the causes giving rise to the claim and whether there is a basis to pass it through to the Government; gathering documentation to support the claim; evaluating what damages arose out of the claim; selecting the appropriate theories of recovery, and clearly explicating what claims are and are not to be passed through to the agency.  Any liquidating agreement should, therefore, include an attachment identifying all pass-through claims that the contractor and subcontractor agree to pursue against the agency, as well as existing claims, if any, that the subcontractor reserves under its subcontract.

Language of Conditional Liability

As explained by the CBCA: “A liquidation agreement under which the prime contractor remains conditionally liable to the subcontractor only as and when the prime contractor receives payment from the Government suffices to permit the prime contractor to proceed against the Government,” notwithstanding Severin.[30]  A good liquidating agreement will avoid completely exculpating the general contractor and explicitly provide that the contractor remains liable to the subcontractor for part or all of any recovery it gets on the pass-through claims submitted to the agency.   As discussed below, the timing and scope of the subcontractor’s recovery are a product of negotiations between the parties to the liquidating agreement.  But as long as the language is clear that the general contractor remains potentially liable to reimburse the subcontractor at some point in the future, the Severin defense will likely fail.

Means of Prosecuting Claims and Appeals

Litigation can be convoluted, expensive, and time-consuming, particularly in the specialized field of government contracts.  The challenges of litigating under the CDA are magnified with respect to pass-through claims, which involve a second layer of attorneys, document custodians, and fact witnesses.  Conflicts of strategy often arise due to disparities between the general contractor and subcontractor’s financial resources, corporate culture, chosen legal counsel, expert preferences, litigation tolerance, and settlement range.  For pass-through claims, problems can also creep up in discovery on account of the fact that the general contractor and subcontractor utilize different electronic data systems, have unique document-retention policies, and operate out of different physical locales.  These issues can really test the ability of CDA claimants to present a united front when it comes time to present claims to the agency.  Good liquidating agreements, therefore, spell out the means by which the parties mutually agree to prosecute the appeals so as to maximize their recovery while protecting their respective rights.

Choosing Counsel and Allocating Responsibility for Fees

The liquidating agreement should establish which counsel will take the lead in litigation, the extent to which each party is responsible for paying attorneys’ fees, and the timing for reimbursement of such fees between them.  In some cases, the underlying subcontract gives the general contractor the right to use counsel of its choice to the exclusion of subcontractor counsel, though such provisions can always be ratified in a liquidating agreement.  Choice of counsel may depend on the subcontractor’s stake relative to the general contractor’s global claims against the agency.  If the subcontractor’s claim comprises most of the appeal value, it may be preferable to have subcontractor counsel take the lead in litigation.  Corresponding responsibility for fees may be allocated based on a fixed percentage of costs, a proportionate value of the subcontractor’s claim to the overall appeals, or some other formula agreed to by the parties.  For the most part, the general contractor and subcontractor are free to come to whatever fee arrangement that suits their mutual interest subject, of course, to any ethical or state-specific restrictions.

Selecting the Most Advantageous Venue

The CDA offers parallel tracks for appealing an adverse final decision by a contracting officer.  Claimants may either: (i) file a complaint in the United States Court of Federal Claims (COFC) within a year of receiving a decision, or; (ii) pursue an administrative appeal at the appropriate board of contract appeals, within 90 days of the decision.[31]  While both venues are subject to the jurisdiction of the Court of Appeals for the Federal Circuit, appeals before the COFC are more akin to federal litigation with respect to procedural rules, evidentiary principles, and litigation deadlines.  Proceedings before the CBCA (or, for contracts with defense agencies, the ASBCA) tend to move faster, involve more relaxed procedural and evidentiary rules, and are decided by a panel of three administrative law judges.  Under the “election doctrine,” the filing of an appeal in one forum is permanent, and transfer to an alternate venue is permissible only under extremely limited circumstances.[32]

The liquidating agreement should identify the forum where the appeal will be pursued.  Most of the time, the subcontract language only requires that pass-through claims to follow the CDA appeals process, but do not mandate one forum over the other.  When deciding pass-through arrangements, parties should consider the complexity and value of the appeals, the existing precedent governing the issues in dispute, and the available litigation budget, among other practical considerations.  The venue choice should be finalized in the liquidating agreement before submission of the pass-through claim, so as not to create a situation where the 90-day appeal period lapses while the parties negotiate other liquidation terms.

Discretion Over Expert Selection and Responsibility for Costs

Claims worth pushing through a hearing almost all require expert testimony.  Delay claims will fail in the absence of a critical path scheduling expert.  Labor inefficiency claims must be supported by an expert versed in the measured mile or another industry-accepted method for determining efficiency losses.  Allegations of defective design are worthless without testimony on causation from a qualified expert.  Almost every type of construction claim requires an expert to corroborate that the damages claimed are reasonable, allowable, and allocable to the contract.  Experts are, in short, a necessary and expensive part of any construction-related CDA appeal.

The liquidating agreement should: (i) identify all issues on which an expert engagement will be needed; (ii) set forth agreement, if any, on who will serve as a testifying expert, and; (iii) establish who will compensate the experts and how that party may obtain reimbursement from its partner.  Selecting experts at an early stage of litigation is beneficial for a number of reasons.  Experts are more effective when they are permitted to develop knowledge of the material facts and salient documents before the appeal is filed.  Experts can inform litigation projections and settlement positions.  Early selection of an expert can also signal to the Government that the claimant is serious about pursuing its appeal all the way to resolution.  Better to negotiate expert issues up front than to run into conflicts later in the event there is a disagreement between general contractor and its claimant subcontractor.

Responsibility for Other Litigation Costs

Unfortunately, attorneys and experts are not the end of the line when it comes to litigation costs.  To see a case through to completion, pass-through claimants should expect to incur expenses for travel and accommodations, court reporters, research costs, data imaging and storage, copying and scanning, trial technicians, and the many other incidental expenses inherent to litigation.  The applicable rates for such costs should be defined in the liquidating agreement and allocated to the parties to allow each to fully understand the scope of the litigation budget and what each can expect to pay if the matter does not settle with the Government.

Requirement of Mutual Cooperation

Most liquidating agreements include a catch-all provision obligating the parties to pursue the appeals in good faith and actively support each other to maximize recovery on the pass-through claim.  Since construction claims are document-intensive, liquidating agreements usually require mutual cooperation in sharing documents and jointly complying with discovery requests.  Success at trial of a pass-through claim usually means that both general contractor and subcontractor will make available to testify the relevant project executive, project manager, superintendent, or other key personnel that participated in the construction project.  The liquidating agreement may or may not include a provision establishing periodic meetings between representatives of the contractor and subcontractor in order to monitor the overall progress of the litigation effort.

Discretion to Appeal Final Judgment to the Federal Circuit

The liquidating agreement should declare which party has discretion to appeal a judgment that is less than satisfactory to one or both of the parties.  Most typically, the general contractor reserves the exclusive right to decide whether to appeal an adverse decision to the Court of Appeals for the Federal Circuit.  Even where the general contractor is willing to afford the subcontractor discretion to appeal, the liquidating agreement may shift the legal costs and administrative burden of pursuing the appeal to the subcontractor.

Terms of Recovery for Judgment or Settlement

Once the parties to a liquidating agreement have identified all pass-through claims and decided where and how to pursue recovery against the agency, they face the million dollar question: who gets what if we win?  There are many factors to consider when deciding how to appropriate proceeds of a settlement or final judgment against the Government.  Who has a greater share of risk under the liquidating agreement?  Who bore the bulk of the litigation and expert costs?  To what extent did the trier of fact allocate recovery for the subcontractor’s cost in its ruling?  As with most other issues in the liquidating agreement, the allocation of settlement or judgment proceeds is a product of free negotiation between the subcontractor and general contractor.  The issues discussed below are incidental to, but can also be dispositive of, the ultimate allocation of the judgment or settlement.

Settlement Authority

As over ninety percent of cases settle before trial, the authority to resolve a case can be a contentious issue during negotiations over the terms of a liquidating agreement.  On the one hand, general contractors may be repeat players in government contracting and are hesitant to cede settlement authority to subcontractors and risk souring their relationship with the Government or engaging in a prolonged battle that can compromise their ability to procure other federal work.  On the other hand, the subcontractor typically has a greater relative stake in the appeal of a pass-through claim.   The subcontractor may also be wary of giving the general contractor unilateral settlement rights where it has an incentive to quickly dispose of the claims for less than their value, rather than take on the risk and uncertainty of finishing litigation.  Liquidating agreements may: (i) give the general contractor plenary authority to settle; (ii) mandate that any settlement be approved by the subcontractor, or; (iii) implement a middle-ground regime, such as establishing a minimum threshold settlement amount or increasing the subcontractor’s proportional share of recovery for settlements below a specified value.

Application of Costs and Expenses Against Settlement Proceeds

While the liquidating agreement may specify prompt reimbursement of litigation expenses and attorneys’ fees, reimbursement doesn’t always happen promptly.  The outstanding costs to attorneys, experts, and vendors are usually reconciled against settlement or judgment proceeds before either party receives their specified share of the award.  The liquidating agreement should specify which costs, fees, or both are to be resolved prior to distribution of the settlement, as well as whether any escrow arrangement is required to facilitate closure of the liquidating costs.

Accounting for Partial Recovery and Government Counterclaims

Judges do not always explicate the rationale for their decisions in a manner that allows reasoned apportionment of damages.  For example, assume the general contractor submits a delay claim seeking a 100-day time extension and $100,000 in compensation for extended overhead collectively incurred by it and its subcontractor.  The judge may find that the general contractor is responsible for concurrent schedule delay of 20 days and reduce the award of damages by $20,000.  The judge’s order may not specify one way or another whether the pass-through subcontractor bore any responsibility for the concurrent delay.  In this scenario, the subcontractor might argue that it is entitled to full recovery of its award as apportioned by the general payment provision of the liquidating agreement, with no reductions for concurrent delays.  If it surmises that the subcontractor contributed to delays, the general contractor may feel that a reduction is appropriate.

The same predicament may arise in the event the Government asserts offsets for liquidated damages or other counterclaims.  Many times, the Government does not assert counterclaims until after CDA appeals have begun, which magnifies the importance of sorting out respective liability for Government offsets in the liquidating agreement.  Reaching a fair allocation of liability for future Government claims can be challenging, especially where the offsets are only partially related to the subcontractor’s performance of work.  Parties to a liquidating agreement are well-served to consider the risk of partial judgments, based on facts that are known and shared between them at the time of negotiations, incorporating these risks into the general pay-out structure.

Preservation of Common Interest Privilege

Prosecuting pass-through claims involves a good deal of coordination between the parties to a liquidation agreement and their respective legal counsel.  In order to preserve the confidentiality of communications between the general contractor, subcontractor, and counsel, liquidating agreements generally include a provision giving rise to a “common interest” or “joint prosecution” privilege.  The common interest privilege is conceptually similar to the attorney-client privilege over confidential legal communications, but applies to multiple parties.  The common interest privilege applies any time a litigant and a third party “share an interest in actual or potential litigation against a common adversary.”[33]

Although the existence of a written agreement establishing a common interest privilege is strong indicia that the privilege applies, oral agreements to jointly prosecute claims may provide the requisite basis for privilege.[34]  Thus, the parties to a liquidating agreement should expressly indicate the date that they first elected to pursue a pass-through claim, so as to retroactively cover any discussions that precede an executed liquidating agreement.

Indemnification for False Statements

Government agencies may threaten or assert counterclaims for false representations or false claims based on perceived factual misstatements in a pass-through submission.  The liquidating agreement should account for potential counterclaims based on false statements, and should expressly address liability under both the CDA[35] and the False Claims Act.[36]  As the party with the best knowledge of the basis for the claim, the subcontractor usually bears the bulk, if not all, of liability in the event the Government asserts CDA fraud or brings an FCA suit, including responsibility for paying legal costs incurred to defend such actions.


Nothing in the law compels federal contractors to enter into a liquidating agreement before submitting a pass-through claim to the Government.  That said, a properly drafted liquidating agreement that preserves the general contractor’s conditional liability to the subcontractor is an one means of avoiding Severin problems.  The trend in government contracts courts and boards is to construe Severin narrowly and allow pass-through claims to move forward as long as the general contractor remains bound to prosecute the claim.  Proceeding under a liquidating agreement gives judges an easy hook on which to hang their hats in denial of the Severin defense.

In addition to keeping Severin at bay, a good liquidating agreement clarifies the rights and obligations of both parties so as to mitigate risk and allow for better decision-making.  The parameters for executing the pass-through claim are the product of negotiations and involve inherent tradeoffs.  But where there is a clear Government impact or interference with the work, the liquidating agreement serves as a cohesive blueprint for appealing an adverse decision to deny additional time or money.  The negotiation of liquidating agreements must account for all Government-caused claims, determine whether there are good grounds for recovery on the subcontractor’s behalf, strategize regarding the best legal theories to pursue and the right counsel and experts needed to prevail, and resolve other ancillary questions pertinent to the pass-through process.  While the CDA will also be a challenging avenue for obtaining relief against the sovereign, the use of liquidating agreements can significantly lower the administrative burden and mitigate the common pitfalls that so often grind pass-through claims to a halt.

[1] 41 U.S.C. §§ 7101, et seq.

[2] Winter v. FloorPro, Inc., 570 F.3d 1367, 1369 (Fed. Cir. 2009) (citing S. Rep. No. 95-1118, at 1 (1978)).

[3] The CDA limits jurisdiction to suits by “contractors,” which is expressly limited to entities in privity with the procuring agency.  41 U.S.C. § 7101(7).  While subcontractors have tried to sue the government under the CDA using novel theories of jurisdiction, these efforts have been almost universally rejected.  Most notably, the Winter court rejected the argument that subcontractors are intended third-party beneficiaries under federal procurement contracts.  570 F.3d at 1371; but see 48 C.F.R. § 32.112-1 (permitting the contracting officer on a construction contract to withhold or reduce payment from the prime contractor that is not current on amounts due and owing to subcontractors).

[4] See James F. Nagle and Jonathan A. Demella, A Primer on Prime Contractor-Subcontractor Disputes Under Federal Contracts, The Procurement Lawyer (Winter 2011).

[5] The Severin doctrine originated in the landmark decision in Severin v. United States, where a pass-through claim for delay damages was barred by a no-damages-for-delay clause in the subcontract.  99 Ct. Cl. 435 (1943).

[6] See MW Builders, Inc. v. United States, 143 Fed. Cl. 469, 511 (2018) (denying subcontractor pass-through recovery based on general release language in mandatory lien waiver submitted with progress payments).

[7] M.K. Ferguson Co. v. United States, No. 12-57 C, 2016 WL 1551650, at *14 (Fed. Cl. Apr. 14, 2016) (citing Mitchell Constr. Co. v. Danzig, 175 F.3d 1369, 1370-71 (Fed. Cir. 1999)).

[8] See Danzig, 175 F.3d at 1371 (“But when the government either fails to raise its Severin / sovereign immunity defense at trial, or raises it and fails to prove it, then the claims of the subcontractor are treated as if they are the claims of the prime contractor, and any further worry about the absence of subcontractor privity with the government is extinguished.”)

[9] Cross Constr. Co. v. United States, 225 Ct. Cl. 616, 618 (1980); Freedom Sys., LLC, ASBCA No. 59259, 15-1 BCA ¶ 36103 (Sep. 3, 2015) (“[T]he government must show an unconditional iron-clad release that clearly protects the contractor from any and all liability to the subcontractor for the conduct in question.”); Acquest Gov’t Holdings, CBCA No. 413, 08-1 BCA ¶ 33720 (Nov. 7, 2007) (“In its present state, the doctrine applies only where there is an iron-clad release or contract provision immunizing the prime contractor completely from any liability to the subcontractor.”)

[10] Perry-McCall Constr., Inc. v. United States, 46 Fed. Cl. 664, 671 (2000).

[11] Harper/Nielsen-Dillingham, Builders, Inc. v. United States, 81 Fed. Cl. 667, 675 (2008).

[12] 48 C.F.R. § 233-4, Applicable Law for Breach of Contract Claim (Oct. 2004).

[13] 81 Fed. Cl. at 678-79; see Acquest, CBCA No. 413 (applying Colorado principles of contract interpretation to construe language in subcontractual change order).

[14] Under the Miller Act, subcontractors have one year from the last date that labor was performed or materials were furnished to bring a claim against the general contractor and payment bond surety.  40 U.S.C. § 3133(b)(4).  The CDA, however, allows claimants to bring suit within six years of the date the claim accrues.   41 U.S.C. § 7103(a)(4)(A).

[15] See Ralph C. Nash, et al., Admin of Gov’t Contracts (4th ed. 2006), p. 1251 (“[T]he fact that the contractor does not agree with the subcontractor may be used as evidence of the reasonableness of the government’s position.”)  However, binding final decisions of a state court or arbitration panel, upon a full hearing on the merits, may have a preclusive, Severin effect.  See James Reeves Contractor, Inc. v. United States, 31 Fed. Cl. 712, 715 (1994) (Government had no liability to general contractor where subcontractor’s pass-through claim had been tried and decided by arbitration panel in favor of general contractor).

[16] See Turner Constr. Co., CBCA Nos. 2862, 4085, 4802, 15-1 BCA ¶ 36139 (Oct. 19, 2015) (subcontract provision limited recovery for delays and interference to “the extent Turner has actually recovered corresponding cost reimbursement, compensation or damages from the Owner.”)

[17] Kentucky, Ohio, and Washington have enacted statutes preempting, on grounds of public policy,  the enforcement of no-damages-for-delay clauses between private parties.  Ky. Rev. Stat. Ann. § 371.405; Ohio Rev. Code Ann. § 4113.62; Wash. Rev. Code Ann. § 4.24.360.

[18] Harper/Nielsen-Dillingham, 81 Fed. Cl. at 675 (California statute precluding no-damages-for-delay clauses in state-level contracts did not render clause unenforceable between private parties); The Clark Constr. Grp., Inc., GAOCAB No. 2003-1, 2004 WL 5462234, at n. 217 (alleged bad faith and active interference by the agency did not render no-damages-for-delay clause unenforceable).

[19] Turner Constr. Co. v. United States, 827 F.2d 1554, 1561 (Fed. Cir. 1987).

[20] Id. (citing S. Rep. No. 1118, 95th Cong., 2d Sess., at 5 (1978)).

[21] TAS Grp., DOTCAB No. 4535, 06-2 BCA ¶ 33441 (Nov. 20, 2006).

[22] Id.

[23] ASBCA No. 59259, 15-1 BCA ¶ 36103 (Sep. 3, 2015).

[24] Id.

[25] Acquest, CBCA No. 413.

[26] Id.

[27] Id.

[28] Id.

[29] Under the “essential difference” test, a CDA claimant “is not precluded from changing the amount of the claim or producing additional data in support of increased damages…[but] must be precluded, however, from raising any new claim before this court which was not previously presented and certified to the contracting officer for decision.”  J.F. Shea Co. v. United States, 4 Cl. Ct. 46, 49 (1983); see Cox & Palmer Constr. Corp., ASBCA No. 43441, 93-3 BCA ¶ 26005 (Apr. 30, 1993) (contractor’s acceleration claim was never presented to the contracting officer and was therefore dismissed for lack of jurisdiction and required to be resubmitted to the agency).

[30] 801 Mkt. St. Holdings, L.P., CBCA No. 425, 08-1 BCA ¶ 33853 (May 2, 2008).

[31] 41 U.S.C. §§ 7104, 7105.

[32] Bonneville Assoc. v. United States, 43 F.3d 649, 653 (Fed. Cir. 1994) (“[O]nce a contractor makes a binding election to appeal the CO’s final decision to a board of contract appeals or to the Court of Federal Claims, the contractor can no longer pursue its claim in the other forum.”)

[33] LHF, LLC, CBCA No. 395, 08-2 BCA ¶ 33915 (Jul. 25, 2008).

[34] Id. (“A written agreement is the most effective method of establishing the existence of a common interest agreement, although an oral agreement whose existence, terms and scope are proved by the party asserting it, may provide a basis for the requisite showing.”)

[35] The CDA makes contractors liable for the Government’s costs of reviewing and litigation claims to the extent they involve “misrepresentation of fact or fraud by the contractor.”  41 U.S.C. § 7103(c).

[36] False Claims Act liability extends to knowing and material false or fraudulent claims for payment, and can includes penalties, payment of Government costs, and potential treble damages sustained by the agency.  31 U.S.C. § 3729.

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