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U.S. Government Facilities Project - Termination for Convenience

The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.


Linden Building Systems Settlement Proposal

Interface Consulting has prepared this document to supplement Linden Building Systems, Inc.’s (Linden), initial Settlement Proposal dated January 30, 2009, and to respond to the inquiries set forth in Konuma, LLC’s (Konuma), e-mail dated....


I. Introduction

I.A. Project Description

Konuma entered into a contract with Linden on June 4, 2007, to manufacture and install a two-story modular Department of Homeland Security building in Kentucky (DHS Kentucky project). The original contract schedule, contract Exhibit A, indicated that Linden would begin work in June 2007 and achieve occupancy of the building in April 2008. Konuma terminated the contract with Linden for convenience with an effective date of November 25, 2008, over six (6) months after the original project completion date. At the time of termination, Linden had expended significant time on professional services and project development. While Linden completed its technical services and support to the design of the building, Linden had not begun any manufacturing or construction activities in the plant or at the site, as shown in the following project schedule.


Planned versus Actual Project Schedule


Linden’s participation in the project development/design phase of the schedule was extended from approximately four (4) months to approximately 17 months. During this phase of the project, Konuma and/or the government made significant design and design requirement changes to the project, which delayed, disrupted, and extended Linden’s work. Not only did these changes increase the duration of the project development/design phase, but they also increased the labor cost, subcontractor costs, overhead, and general and administrative (G&A) costs.

Linden detailed these changes in its letters and other communications to Konuma, including letters dated....

On January 30, 2009, Linden submitted its Subcontractor Proposal to Konuma along with U.S. General Services Administration (GSA) Standard Forms (SFs) 1436 and 1439. Konuma responded to Linden’s Subcontractor Proposal on…, requesting additional information and further backup documentation. This Settlement Proposal is intended to address Konuma’s inquiries to the....

I.B. Linden's Project Accounting System

Linden manufactures commercial modules and typically recovers all of its costs through the sale and installation of commercial modules. It is not Linden’s customary project accounting practice to attribute technical services, design management, overhead, G&A costs, and profit to individual project job cost reports.

Linden does not assign design, overhead, G&A costs, and profit to its individual job cost reports. As such, Linden did not and has not assigned costs to the job cost report for the DHS Kentucky project, because Linden had not incurred direct construction labor or material costs as of the termination date.

For its project estimates, Linden applies a factor to its manufacturing, direct construction labor, material, and subcontract costs to recover its design, overhead, G&A, and profit. For this project, Linden applied a factor of approximately 30% to its estimated direct construction labor, material, and subcontract costs to recover its design, overhead, G&A, and profit. Linden’s typical factor ranges from 25% to 45%.


II. Summary of Termination for Convenience Expenses

This section comprises a summary of Linden’s termination for convenience expenses incurred as a result of its termination from the DHS Kentucky project. The following table summarizes the expenses that Linden incurred as a result of its termination for convenience that are due Linden from Konuma in accordance with the contract and related Federal Acquisition Regulations (FARs). Linden requests $228,508 from Konuma due to Konuma’s termination for convenience of the contract, as shown in the following chart.


Linden’s Expenses – Termination for Convenience – Subcontractor Settlement Proposal

1Labor Cost is discussed in detail in Section III.A. of this report.
Overhead and G&A Costs are discussed in detail in Section III.B. of this report.
Other Costs are discussed in detail in Section III.C. of this report.
Profit is discussed in detail in Section III.D. of this report.
5Termination for Convenience Settlement Costs are discussed in detail in Section III.E. of this report.


III. Details of Termination for Convenience Costs

In this section, details for each of Linden’s categories of termination for convenience costs will be discussed. FAR Part 52.249-2, Termination for Convenience of the Government (Fixed Price); Part 31.205-42, Termination Costs; and Part 49.602-1, Termination Settlement Proposal Forms have been used as a guideline to evaluate the termination costs recoverable by Linden relative to the DHS Kentucky project.

III.A. Labor Cost

As previously discussed, Linden does not customarily record its technical services, project development, design management, and G&A labor hours based on individual projects; therefore....

Based on the actual labor hours Linden expended, a total labor cost was determined by applying the actual labor rate cost to Linden with a 15% markup for Federal Insurance Contributions Act (FICA), medicare, fringes, state and federal unemployment, insurance, and workers compensation as shown in the following chart.


Total Actual Labor Costs as a Result of the Termination for Convenience

1The Actual Labor Rate per Hour was determined by....


III.B. Overhead, and General and Administrative Costs

Overhead and G&A costs are allowable for recovery under a termination of the contract for convenience. Linden’s consolidated financial statements were used to determine the applicable overhead and G&A costs....

The calculation is shown in the following table.


Linden Financial Statements – Total Allocable Overhead and G&A Costs


Linden’s overhead and G&A costs (less labor cost) amount to 38% of Linden’s labor cost. Linden applied this 38% ratio to the actual labor costs that Linden incurred on the DHS Kentucky project to determine the allocable overhead and G&A costs for this particular project. The calculation is as follows.


Allocable Overhead and G&A Costs to DHS Kentucky Project
(Does not include any Labor Cost determined in previous section of this document)


III.C. Other Costs

Linden is entitled to the indirect costs of the work and profit associated with this work....

III.D. Profit

Parts 49.202 and 52.249-2 (g)(2)(iii) of the FAR address profit. Profit for work performed prior to termination is allowed under the contract, and the amount Linden contemplated in its subcontract price was 12%. Profit has not been applied to the Settlement Proposal cost. Linden is due $20,832 in total profit as a result of Konuma’s termination of the contract for convenience.

III.E. Termination for Convenience Settlement Costs

Linden incurred costs....


IV. Response to Konuma's Inquiries

This section responds to Konuma’s inquiries made in Mr. Brian Cole’s e-mail dated February 9, 2009,....


V. Exhibits - Substantiation