{"id":905694,"date":"2026-05-20T15:22:19","date_gmt":"2026-05-20T21:22:19","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=905694"},"modified":"2026-05-20T15:22:23","modified_gmt":"2026-05-20T21:22:23","slug":"construction-contract-101-part-3","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/construction-contract-101-part-3\/","title":{"rendered":"Contract Claims 101: Financial Fundamentals, Part 3"},"content":{"rendered":"\n

Lauren Brier, Josie Farinelli, Abigail Finan and Kelly A. Kirchgasser | Piliero Mazza<\/a><\/p>\n\n\n\n

We\u2019re back for the third installment of\u00a0PilieroMazza<\/a>\u2019s\u00a0REAs, Claims, and Appeals Group<\/a>\u2019s \u201cContract Claims 101\u201d series, introducing federal contractors to the basics of requests for equitable adjustment (REAs), claims, and appeals. This month, we\u2019re defining the key terms underpinning the basic financial framework of government contract disputes. Financial rules can make or break a contractor\u2019s recovery: Cost Accounting Standards (CAS) dictate how costs must be built, Contract Disputes Act (CDA) interest can influence the timing and value of settlements, and the list goes on. Contractors who understand these concepts\u2014and who partner with counsel fluent in them\u2014are better positioned to maximize recovery and avoid costly missteps.\u00a0In this blog, we introduce federal contractors to some of the financial concepts necessary to navigate REAs, claims, and appeals, because even the strongest entitlement arguments can falter if the underlying cost principles and financial mechanics are handled incorrectly.<\/em><\/strong><\/p>\n\n\n\n

Sum Certain and Claim Certification<\/strong><\/p>\n\n\n\n

Under the Federal Acquisition Regulation (FAR), submitting a claim requires that the contractor present the government with a sum certain, which is the specific, exact dollar amount (not an estimate) of harm, ensuring the claim is definite and can be acted upon. As we mentioned in our first blog, when that claim exceeds $100,000, the contractor must also provide a claim certification, which is a formal written statement affirming that the claim is made in good faith, that the supporting data are accurate and complete to the best of the contractor\u2019s knowledge, that the amount requested accurately reflects the contract adjustment believed to be due, and that the certifier is authorized to bind the contractor.<\/p>\n\n\n\n

Quantum and Pricing Methodology<\/strong><\/p>\n\n\n\n

In a contract appeal, entitlement and quantum are distinct questions the judge must resolve. Entitlement addresses liability and determines whether the contractor is legally entitled to compensation. Typically, the parties will agree to try entitlement first, and if entitlement is established, the case will move to quantum, which deals with how much the contractor should be paid. Quantum is all about pricing\u2014calculating the dollars associated with the proven impact, using accepted cost methods and credible evidence. In short, entitlement answers \u201cshould the contractor recover,\u201d while quantum answers \u201chow much is the recovery worth,\u201d and both must be proven for a successful appeal.<\/p>\n\n\n\n

When making their case for quantum, contractors often underestimate how much their pricing methodology can make or break their claim. The government scrutinizes not just what you\u2019re asking for, but how you calculated it. In practice, three approaches dominate federal contract claims:<\/p>\n\n\n\n

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  1. Actual Cost Method: Any contractor who has been through a dispute has probably heard their attorney say, \u201cactual costs are the gold standard.\u201d This is true as the actual cost method relies on verified, documented costs directly tied to government\u2011caused changes or delays.<\/li>\n\n\n\n
  2. Modified Total Cost Method: When their records are incomplete, contractors sometimes turn to the modified total cost method, which starts with total incurred costs but adjusts for any inefficiencies or unrelated expenses.<\/li>\n\n\n\n
  3. Total Cost Method: This method is the least favored, as it simply subtracts the original bid from total costs incurred. Agencies rarely accept it without compelling justification.<\/li>\n<\/ol>\n\n\n\n

    As a general principle, no matter the method you choose, contractors should avoid estimates or unsupported projections, which can trigger audits or even fraud concerns. Those concerns do not stop just because a contracting officer approves a claim. Payment isn\u2019t automatic, so the contract must be formally modified, and that adjustment may be subject to further review. Engaging counsel and, where necessary, knowledgeable government contract accountants who understand these nuances can help contractors present defensible pricing, protect their recovery, and navigate, if not avoid, unpleasant audits and investigations.<\/p>\n\n\n\n

    Allowability, Allocability, and the Cost Accounting Standards<\/strong><\/p>\n\n\n\n

    Per FAR Part 31, allowability is the principle that costs must be reasonable, allocable, comply with generally accepted accounting principles (GAAP), and not be expressly unallowable (e.g., alcohol, entertainment). Allocability is the principle that costs must be assignable to the specific contract, meaning it was incurred specifically for that contract or benefits both the contract and other work. The CAS, where applicable, helps the government standardize cost allowability and allocation among other principles.<\/p>\n\n\n\n

    The CAS are a set of 19 government\u2011unique accounting rules that dictate how contractors must measure, assign, and allocate costs on CAS\u2011covered contracts. CAS applies to contracts, rather than to contractors or agencies. All negotiated contracts in excess of $2.5 million are subject to CAS, unless an exemption applies.  Notable exemptions to CAS include contracts\/subcontracts with a small business, sealed bid contracts, and commercial items contracts authorized in FAR 12.207, among other exemptions. Moreover, where the award is subject to CAS but under $50 million, and the business has not received $50 million or more in net CAS-covered awards in the preceding and current cost accounting periods, the contract may be subject to modified CAS coverage (meaning compliance with only 4 of the 19 standards).<\/p>\n\n\n\n

    CAS compliance is typically seen as an accounting issue, and that is true, but it is also frequently a litigation issue. Here are three key CAS-related considerations to keep in mind:<\/p>\n\n\n\n

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    1. CAS compliance affects entitlement and quantum.\u00a0If your cost buildup violates CAS, the government will challenge it\u2014regardless of the underlying merits of your REA or claim.<\/li>\n\n\n\n
    2. Consistency is key.\u00a0CAS requires contractors to treat similar costs consistently across contracts. Inconsistency can lead to disallowances or defective pricing allegations.<\/li>\n\n\n\n
    3. CAS noncompliance can trigger offsets.\u00a0Even when the government owes you money, auditors like the Defense Contract Audit Agency (DCAA) may assert that CAS noncompliance reduced the government\u2019s costs elsewhere, reducing your recovery.<\/li>\n<\/ol>\n\n\n\n

      Interest<\/strong><\/p>\n\n\n\n

      Contractors often assume that submitting an REA automatically entitles them to interest. This is not the case. That said, there are two common types of interest under which the government may be liable when certain conditions are met:<\/p>\n\n\n\n

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      1. Prompt Payment Act Interest<\/li>\n<\/ol>\n\n\n\n

        The Prompt Payment Act (PPA) provides interest on late invoice payments, not on REAs. However, PPA interest may come into play when a REA is structured as a request for payment under an existing invoice mechanism, or the agency agrees to treat the REA as a payment request under the PPA. Even in these cases, PPA interest is not guaranteed. Agencies frequently dispute its applicability, and the case law is highly fact\u2011specific. Still, when available, PPA interest can be substantial\u2014especially on multi\u2011year delays.<\/p>\n\n\n\n

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        1. CDA Interest<\/li>\n<\/ol>\n\n\n\n

          Unlike PPA interest, CDA interest is relatively straightforward. Once a contractor submits a certified claim under the CDA, interest begins to accrue from the date the contracting officer receives the certified claim until the date the government pays. CDA interest applies regardless of whether the claim is ultimately resolved at the agency level, the Board, or the Court of Federal Claims.<\/p>\n\n\n\n

          For many contractors, the decision to convert an REA into a CDA claim is driven as much by interest accrual as by litigation strategy. Submitting a certified claim earlier can increase leverage because delays in the contracting officer\u2019s decision increase the government\u2019s financial exposure in CDA interest. In short, CDA interest can significantly enhance the value of a settlement.<\/p>\n\n\n\n

          Judgment Fund<\/strong><\/p>\n\n\n\n

          When a contractor wins a monetary award at the Court of Federal Claims or a Board of Contract Appeals, the agency can elect to pay that award from the Judgment Fund, a permanent, indefinite appropriation managed by the Department of the Treasury. While the Judgment Fund is typically a color-of-money, government-side consideration, understanding when the Judgment Fund applies can shape your negotiation posture and timing. There are a few reasons contractors should take note when an agency plans to use the Judgment Fund or indicates that it lacks appropriations:<\/p>\n\n\n\n