When is Simple Negligence “Gross Negligence” And Why Should This Concern Your Company?

In a recent Federal Circuit ruling, KBR found out that “simple negligence” in its calculations of a reasonable price range for subcontractor’s price proposal resulted in a “Gross Negligence ruling” by the courts. Kellogg Brown & Root Services, Inc. (KBR) v. U.S., No. 203-5030, slip op. (Fed. Cir. Feb, 3, 2014).

KBR was awarded a cost reimbursement US Army contract for services, to include food services, in Iraq, and KBR subcontracted out the food services portion of the prime contract. After the initial award, the scope of food services requirements was doubled by the Army which required the subcontractor and KBR to recalculate the potential costs for the increased in the number of troops to be fed. KBR’s subcontract negotiator made a mathematical error in its formula for calculating the potential costs of the additional food services.  This error in KBR calculation resulting in quadrupling the potential cost range from which KBR would evaluate the subcontractor’s cost proposal for the additional services

Subsequently, KBR received a proposal from the subcontractor that actually tripled their initial cost estimate instead of doubling to meet the Army’s new requirements for the number of troops requiring dining services.  According to the Court, KBR knew of the error in its cost calculation formula, yet went ahead and used the flawed cost range to evaluate the reasonableness of the subcontractor’s proposal. 

Therefore when evaluating the subcontractor’s proposed cost increase, the subcontractor’s  tripling of costs was within the range of potential costs increase calculated by KBR and KBR approved the subcontract’s costs increase which were eventually billed to the government for the additional dining services.  The excess billing was disallowed by the Government and KBR sought recovery for the disallowed cost.

The Federal Circuit ruled that KBR’s negligence in using a known flawed cost formula in evaluating the subcontractor’s proposed costs and the subsequently inflated billed costs “arose out of grossly negligent mistakes.” What does this ruling mean to your company? That known simple mathematical errors left uncorrected maybe considered “Gross Negligence” and result in significant financial risk to your company. Therefore it is imperative that companies take the necessary steps to ensure that its cost proposal calculations are free of any and all mathematical errors.