[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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[[Page 14763]]


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

[[Page 14764]]
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:

[[Page 14765]]

     [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;
    
[[Page 14766]]

    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                         
------------------------------------------------------------------------
      Date             Description of disbursement            Amount    
------------------------------------------------------------------------
                  (See Note 2 below)...................  ...............
------------------------------------------------------------------------
Note 1.--Description of Service: All fees must be itemized and described
  in sufficient detail and specificity to reflect the purpose and nature
  of the work performed (e.g., subject matter researched or discussed;  
  names of participants of calls/meetings; type of documents reviewed). 
Note 2.--Description of Disbursement: Description should be in          
  sufficient detail to determine that the disbursement expense was in   
  accordance with all applicable DOE policies on contractor litigation  
  costs and the terms of engagement between the contractor and the law  
  firm (e.g., if copying charges, include number of pages copied and    
  cost per page).                                                       

[FR Doc. 96-8171 Filed 4-2-96; 8:45 am]
BILLING CODE 6450-01-P