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Defunct Contractor Sues DOD Over Afghan Contract Changes

March 24, 2015 | By Daniel Wilson | Law360

The trustee for bankrupt contractor Lakeshore Engineering Services Inc. hit the U.S. Department of Defense with a $2.9 million suit in the Court of Federal Claims Monday, arguing it had wrongly been denied its claim for additional costs incurred on an Afghanistan construction contract due to unnecessary changes.

Despite making a unilateral change to contract requirements following completion of construction of certain Afghanistan base facilities that required reworking by Lakeshore, and the Pentagon's third-party inspectors then dragging their feet in inspecting the changes, resulting in Lakeshore facing delay penalties, the defense agency has wrongly refused to pay up for its mistakes, according to the complaint.

"The contracting officer's final decision rejecting Lakeshore's claims ...was unreasonable, an abuse of discretion, and/or not in accordance with the terms of the task order contract and the pertinent facts and law," trustee Alfred Giuliano said.

Chicago-based Lakeshore, which applied for Chapter 7 bankruptcy in May, was awarded a $26.7 million task order by the U.S. Air Force in June 2010 to construct several facilities at Afghanistan's Camp Bastion. Under the terms of the deal, construction on the various facilities had to be completed by certain deadlines, or Lakeshore would be subject to damages for each day it was late in finishing, the complaint claims.

Lakeshore was instructed to use a design intertwining electrical systems across the various facilities that were in compliance with different electrical codes, including the National Electrical Code, the British Standard and various internal military standards.

Based on this instruction, it submitted its plans for the intertwined electrical system it intended to use, prior to beginning construction, winning approval of the intended design in December 2010, the trustee said. After installing the system, however, the relevant contracting officer asked Lakeshore to correct alleged deficiencies, stating that the entire system needed to comply with NEC, the complaint alleges.

This change was inconsistent with the original task order, and Lakeshore outlined its belief that the directive was a change to the contract, but carried out the changes as directed, and was ready for inspection and turnover of the facilities to the military prior to its deadline, according to the trustee.

However, after the Pentagon inspected the facilities, it then tasked two third-party contractors to carry out additional inspections. The standards these contractors used in their inspections were different to the standards the military inspectors had used, based on "a code they preferred to utilize in maintaining the project after completion," rather than the requirements of the contract, the complaint argues.

This inspection process ultimately delayed completion and handover on the facilities by between 130 and 150 days, prompting the Pentagon to withhold more than seven months worth of liquidated damages from Lakeshore, Giuliano said.

The company subsequently petitioned the Pentagon for a nearly $2.9 million cost adjustment to the contract, taking into account the mid-contract change to code requirements and the untimely inspections, but the contracting officer denied Lakeshore's claim in March 2014, ruling that Lakeshore had misstated its intended compliance with the British Standard and that the task order change and third-party inspections were made necessary by Lakeshore's deviation from that standard, the complaint alleges.

This finding wrongly ignored the mix of American and British standards listed in the original contract requirements, as well as the issues around the additional inspections ordered by the Pentagon, and Lakeshore should be entitled to have its extra costs and penalties reimbursed, it argued.

The trustee is represented by Sara Beiro Farabow and Daniel P. Wierzba of Seyfarth Shaw LLP and Christian Auty of Roetzel & Andress LPA.

Counsel information for the government wasn't immediately available.

The case is Lakeshore Engineering Services Inc. v. U.S., case number 1:15-cv-00298, in the U.S. Court of Federal Claims.

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