Liquidating Trustee Ester Du Val of Ki Liquidation, Inc. v. United States

In the United States Court of Federal Claims
No. 06-465C
(Originally Filed: May 31, 2014)
(Reissued: June 11, 2014)1

**********************
LIQUIDATING TRUSTEE ESTER DU
VAL OF KI LIQUIDATION, INC.,

Plaintiff, Contract; Department of
State; default termination;
v. fraud counterclaim;
differing site condition.
THE UNITED STATES,

Defendant.
**********************

Louis James D’Agostino, McLean, VA, David G. Barger, McLean, VA,
Michael Snyder, McLean, VA, and Józef S. Przygrodzki, McLean, VA, of
counsel for plaintiff.

Devin Andrew Wolak and Daniel B. Volk, Civil Division, Department
of Justice, Washington, DC, with whom are Stuart F. Delery, Principal Deputy
Assistant Attorney General, Bryant G. Snee, Acting Director, and Donald E.
Kinner, Assistant Director, for defendant. John C. Sawyer, Department of
State, Washington, DC, and Thomas D. Dinackus, Department of State,
Washington, DC, of counsel.

_______________

OPINION
_______________

1
This opinion was originally filed under seal. Publication was deferred
pending parties’ review for redaction of protected material. The court adopted
the parties’ suggested redaction, which is indicated by brackets, and made
other minor editorial changes. The opinion is now prepared for release.
BRUGGINK, Judge.

Before the court is a dispute involving a contract between the United
States, acting through the Department of State (“DOS”), and Kullman
Industries, Inc. (“KI”), a company now no longer in business, which at the
time specialized in large-scale modular construction. The contract obligated
KI to build the United States Embassy compound in Dushanbe, Tajikistan.
Kullman Industries worked on the project for nearly three years and nearly
brought it to completion before the contract was terminated by DOS for
default. KI went into bankruptcy, and the trustee in bankruptcy succeeded to
its interests, although we will refer to KI rather than the trustee throughout.

KI advances three claims here: first, it challenges the agency’s
termination for default and seeks conversion to a termination for convenience;
second, it advances a claim of approximately $4.3 million for geotechnical
work, which it contends was outside the terms of the contract; and it asserts a
claim of approximately $1 million with respect to additional security
remediation and related mold and mildew mitigation. The government has
counterclaimed, asserting fraud and seeking both monetary penalties and
forfeiture of KI’s claims. The court has jurisdiction to resolve plaintiff’s
claims under the Contract Disputes Act of 1978, 41 U.S.C. §§ 7101-7109
(2012), and pursuant to 28 U.S.C. §§ 1503, 2508 (2012), to adjudicate
defendant’s counterclaims.

The various affirmative and defensive claims were tried between April
and June, 2013. The trial dealt with four issues: 1) whether a portion of the
geotechnical work was outside the scope of the contract; 2) whether the
termination for default was justified; 3) whether certain pay certifications were
false; and 4) which party bore the responsibility for delays and additional costs
associated with construction of a secure part of the embassy. Post-trial briefs
were filed by both parties, and oral argument was heard on January 15, 2014,
after which supplemental briefs were filed. The matter is ready for final
disposition. For the following reasons, we find that the geotechnical work was
within the scope of the contract, the termination for default was justified,
plaintiff did not violate the Forfeiture of Fraudulent Claims Act, although it
did violate the False Claims Act, and the government bears responsibility for
the delays and additional costs associated with the secure space. We reserve
for later resolution the question of damages.

2
 BACKGROUND

I. Kullman Industries

Kullman Industries was a family enterprise. The most recent President
and CEO of KI was Robert Kullman, who featured prominently as a witness
at trial and whose testimony we find to be credible. Mr. Kullman’s
grandfather founded Kullman Dining Car Company, Inc. in the 1920’s.
Kullman Dining Car Company successfully built and sold modular diners in
a way that was faster and more easily financed than traditional construction.
The company would fully construct the modular diner in its factory and then
install it on the buyer’s property.

Over the years, that company expanded from production of small diners
to 6,000-plus square foot restaurants. As a teenager, Robert Kullman got his
start in the family business by sweeping floors, painting, and working
carpentry jobs. After high school, Robert Kullman attended Bucknell
University. During the summers, he continued to work at Kullman Dining Car
Company. The day after he graduated from college, Robert Kullman joined
the family enterprise as Vice President.

In the 1970’s, when the market for diners began to wane, Robert
Kullman and his father jointly created Kullman Industries in an effort to
broaden production and grow the business. KI began using its modular
method to construct bank branches, medical buildings, and schools. The
buildings became larger and more complicated. When cellular telephones
were in their infancy, KI got into market for building modular structures for
the telecommunications industry.

In the 1990’s, KI began working on projects for DOS. KI built the
United States Embassies in Bishkek, Kyrgyzstan; Ashgabat, Turkmenistan;
and Bissau, Guinea-Bissau. Just before KI contracted to build the embassy in
Dushanbe, it was doing about $55 million dollars of business each year. Mr.
Kullman was the President and CEO of KI from the 1980’s until it was
dissolved in bankruptcy.

II. The Dushanbe Project: Phase I

In light of its satisfactory performance of its previous contracts, the
State Department began discussing with KI in April of 2002 the project to

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build a new embassy in Dushanbe, Tajikistan. According to the testimony of
KI’s Chief Operating Officer, John Joseph Lefkus, III, DOS was interested in
pursuing modular construction for the Dushanbe Embassy because of the short
period of time required for construction and installation when compared with
traditional construction and the added benefits to security when construction
is controlled within a factory.

A. Phase I - Design

Because of KI’s unique qualifications, on July 2, 2002, the Director and
Chief Operating Officer of DOS’s Overseas Building Operations (“OBO”),
General Charles E. Williams, agreed to use of a sole source contract with KI
for the Dushanbe project. The stated justification for using other than full and
open competition was that “Kullman Industries, Inc. offers a more direct way
to contract, provides a superior product that meets DS[2] requirements, and, in
addition, has greater experience in servicing the requirements of the
Department.” JX 128 at 3. OBO anticipated a construction budget of
$63,920,000.

The DOS Contracting Officer (“CO”) assigned to the Dushanbe project
at that time was Ralph R. Sutherland. The Contracting Officer’s
Representative (“COR”) was Robert H. Sanders. John Lefkus, KI’s Chief
Operating Officer, represented KI in negotiations.

On July 12, 2002, DOS’s Office of Acquisitions issued solicitation
SALMEC-02-C-0025 for “Phase I”3 to develop a plan for the adaptation of the
standard embassy design to accommodate modular construction and to
facilitate a cost estimate for the Dushanbe embassy. The embassy compound
was to include a New Office Building (“NOB”), also known as the chancery,
the Marine Security Guard Quarters, Warehouse, Compound Access Control
(“CAC” or “gate house”) Building, Material Transfer Station, utility building,
power plant, well water treatment system, septic system, and a perimeter wall
for the compound. The contractor would have 85 days to complete the Phase
I design. The solicitation included over one hundred pages of contract details

2
Neither party has clarified what “DS” means. In the absence of a clear
definition of this acronym, we presume it to refer to “Diplomatic Security.”
3
The project was divided into two phases. The first was the design phase and
the second phase consisted of construction.

4
covering everything from pricing to the Statement of Work (“SOW”) and
referenced additional attachments such as the Standard Embassy Design Intent
Application Manual (“SED manual”), the Site Utilization Plan, and a
Preliminary Geotechnical Report. The SED manual included “the fixed design
elements—the ‘absolutes’ that every project using the Standard Embassy
Design (SED) must follow.” JX 16 at 1, 4. Pursuant to the SED manual, some
elements of the standard design were fixed while other elements could be
adapted to fit the needs of each project.

The SED also provided specifications for a Controlled Access Area
(“CAA”). The CAA was designed as a room within the embassy that contains
special protections for information and occupants.

KI submitted its best and final offer for Phase I of the Dushanbe
contract on August 20, 2002. DOS accepted KI’s offer and issued the notice
to proceed on August 22, 2002. JX 1 at 2. The contract for Phase I was not
executed by Mr. Sutherland and Mr. Lefkus, however, until September 18,
2002. On that same day, Mr. Sutherland and Mr. Lefkus also executed
Modification 001 (“M001”). M001 incorporated several attachments to
Division 1 of the contract and rescinded “Section J,” which included the
Dushanbe Geological Overview, and replaced it with “Section J, Revision 1.”4

While KI worked on Phase I, DOS commissioned the Committee of
Architecture and Building within the Province of the Government of the
Republic of Tajikistan (“SANIIOSP”) to survey, test, and develop a report on
the geotechnical conditions at potential sites for the project. SANIIOSP
produced a report (“geotechnical report” or “SANIIOSP report”), initially in
Russian and then translated into English, on the geotechnical conditions at the
site that was eventually chosen for the Dushanbe project. The geotechnical
report, while perhaps difficult to read, alerted the reader to what the drafters
thought were unusual soil conditions. It reflected that the “main deformation
characteristics of the dusty clay soils, which consist of the sand clay and loamy
soils are the properties of the settlement while putting into the water and the

4
In addition, M001 provided that “[t]he contractor’s proposal for Phase II of
the contract shall include costs to perform requirements described in the
documents” newly incorporated by M001. JX 2 at 1. The contract for Phase
I had a firm fixed-price of $1,025,000.00. Phase II construction of the
Embassy was not guaranteed after the completion of Phase I.

5
first settlement pressure.” JX 10 at 9. Additionally, “[t]he summary quantity
of the possible settlement of the soils because of their own weight can reach
54.84cm with the power of the depth of settlement 16.7m.” JX 10 at 16.
Furthermore, the report provided the following:

The experience of the exploitation of the buildings in the
analogous soil conditions on the territory of Dushanbe shows
that the increase of the moisture content of the soils inevitably
takes place while the engineering development of the territory
because of the break down of the natural regime of the expense
of the different factors (natural and anthropogene). These
changes make [worse] the deformation and strength properties
of the clay soils, the properties of the settlement take place, the
lack of the engineering preparation of the territory can lead to
the deformation of the buildings. . . . [I]t is recommended to do
the projection taking into consideration the full water satiation
of the clay soils.

JX 10 at 15-16. The geotechnical report therefore recommended wetting “the
soil thickness up to the depth of 17m . . . .” JX 10 at 18-19.

KI teamed with the Louis Berger Group (“LBG”), which specializes in
geotechnical engineering, to address the issues involved in developing a
foundation appropriate to the natural conditions of the site. According to an
August 30, 2002 memo, LBG “received a copy of the Geotechnical Report
from OBO on August 16, 2002.” JX 135 at 1.5 On August 30, 2002, Vassilios
Magginas, an architect with DOS, wrote in an e-mail that he had reviewed the
SANIIOSP report and that it was “good, confirms our previous findings, and
contains the basic information to be used for the project.” JX 134 at 1.

B. Site Visit

Phase I included a visit to potential construction sites in Dushanbe,
Tajikistan. KI’s representatives, including Mike Kosinski and Bob Airrika,
traveled to Dushanbe on September 10, 2002, to conduct a site visit and to

5
Although there was a dispute at trial as to when KI or its representatives first
saw the SANIIOSP Report, we find that it was available to plaintiff before it
provided its late-September cost estimate.

6
explore local resources. According to the Contractor’s Trip Report (“Trip
Report”) authored by KI, the site visit lasted until September 14, 2002. JX 137
at 10. The KI representatives were joined by Michael “Mike” Ross, the
Contracting Officer’s Representative and Pete Stella from the government.6
During a meeting that occurred on September 10, 2002, KI attendees were
given a CD-ROM disc containing the “Section-J attachments from the RFQ.”
JX 137 at 22. Pete Stella, Reese Richardson, John Smith, Mike Kosinski and
Bob Airikka met with the Director of SANIIOSP, Saidor Rakhmatullo, who
“indicated that much of the information available for the site was already
included in the geotech report they had prepared.” JX 137 at 9. Mr.
Rakhmatullo offered to provide additional services such as soil testing,
surveying, and designing, but told the meeting participants that SANIIOSP did
not have the necessary equipment to meet the standards set by the American
Society for Testing and Materials (“ASTM”). According to the meeting
minutes, OBO was satisfied with the content of the SANIIOSP report. In the
Trip Report, KI expressed general satisfaction with the information gathered
during the site visit and acknowledged that “OBO provided a geotechnical
report for the property prior to the site visit.” JX 137 at 3-4.

C. Negotiations

Negotiations for Phase II, the separate contract to build the embassy,
began in earnest promptly after the site visit ended. The key issue was price.
On September 20, 2002, Ralph Sutherland wrote the following to his superiors
within OBO, Leroy Wallin, the Director of the Facilities Design and
Construction Division, and Patricia Regalo-Warren, the Branch Chief:

The contractor cannot currently provide an accurate cost
proposal for construction and is reluctant to enter into a GMP
contract at this point. . . . Assuming that the cost [that KI
proposes] is not too outrageous, we will work with the
contractor to establish mutually acceptable terms in determining
the mechanics of converting the construction portion of the
contract into a negotiated fixed price at the (approximate) 30%
design stage. The contract can be structured in a manner that
will obligate the money (using options for other means) for the

6
Although Mr. Sutherland is listed as a team member in the trip report, he
testified that he was not in Dushanbe for the site visit.

7
 construction phase of the project at the time of contract award.

JX 138 at 1.

As of September 24, 2002, the government estimated that the Dushanbe
Embassy complex could be built for approximately $58,365,000. According
to this estimate, the “substructure” or foundations for the NOB should cost
about $1,200,000. “SITEWORK - (EXCLUDING PERIMETER WALLS)”
showed a line item value of $2,750,000. JX 139 at 7. Site work included site
preparation, improvements, civil and mechanical utilities, and electrical
utilities. $12,700,000 was allocated for estimated transportation costs
associated with moving materials and personnel to the site.

On September 25, 2002, KI submitted its “Order of Magnitude Pricing”
to the government. Plaintiff offered Contracting Officer Ralph Sutherland a
total cost estimate of $85,761,803. “Local geotech” was a $25,000 line item
included in that number. Transportation of materials to the site, security
design, landscaping, and furniture, however, were listed as allowances in
specific amounts, presumably meaning that costs in excess of those allowances
would be borne by DOS.

Ralph Sutherland wrote to Bob Sanders on September 25, 2002, that
KI’s initial proposed price of $85,181,803 was $26,816,803 above the
government’s estimate. Mr. Sutherland asked that Mr. Sanders “advise OBO
senior management accordingly and show me the money if OBO wishes to
continue pursuing the Kullman design-build SED/modular approach for the
Dushanbe NOB project.” JX 140 at 1 (emphasis in original). Mr. Sutherland
emphasized, “I need to know how much money we have before I can
establish negotiation objectives and limitations and I need time to put a
pre-negotiation plan together. I do not have any funded requisitions for this
project at the present time.” JX 140 at 1 (emphasis in original). Mr.
Sutherland added, “John Lefkus has informed me that the prices are high
because of limited time and information to put together a proposal for a project
of this magnitude. He will be able to negotiate a realistic firm fixed price with
us at the end of the Phase I design development (November 2002).” JX 140
at 1.

Negotiations continued during the period September 27-30, 2002. On
September 30, 2002, Mr. Sutherland wrote to John Lefkus that KI’s September
25 proposal was unacceptable. Mr. Sutherland explained that the estimate

8
was too high and asked KI to “consider a GMP [guaranteed maximum price]
offer of $60,730,000 in a fixed price contract, without incentives.” JX 143 at
1 (emphasis in original). Mr. Sutherland concluded the e-mail by writing, “If
we do not reach agreement this morning, the project may not be awarded to
Kullman because of what we can afford.” JX 143 at 1. Presumably this was
because September 30 was the last day of the government’s fiscal year. Mr.
Sutherland also proposed certain deletions from the SOW.

Later that day, Mr. Lefkus responded to Mr. Sutherland’s
communication. Mr. Lefkus summed up the changes in the scope of work,
which included reducing the number of gate houses, reducing by 200 lineal
meters the perimeter wall, and reducing the size and function of the utility
building. Mr. Lefkus then lowered the proposed allowance for transportation
to $10 million based on the following: “[f]actors which reduce project scope;”
“[p]otential of local sourcing;” and “[r]equirement to ship only 50% of volume
U.S. flag.” JX 145 at 1. Based on these changes, KI agreed to “entertain a
GMP of $60,730,000.00 noting the $10 million transportation allowance.” JX
145 at 1.

On September 30, 2002, DOS issued Modification number two
(“M002”) to the contract and obligated available funds. The amendment was
issued “for a guaranteed maximum price of $50.730 Mil plus an allowance of
$10.0 Mil for transportation.” JX 149 at 5.

Shortly after Mr. Sutherland closed this deal, Mr. Sanders referred to
Mr. Sutherland as a “miracle worker.” JX 148 at 1. Mr. Sanders was replaced
as COR by Michael (“Mike”) Ross on October 2, 2002.7

7
There was a lot of turnover in the OBO employees who managed the
Dushanbe Project. The parties stipulated to the following chronology of the
Contracting Officers: from July 2002 until December 11, 2003, Ralph
Sutherland was the CO; from December 11, 2003, until June 16, 2004, Lorri
Lowther was the CO; from June 17, 2004, until July 15, 2004, Lisa Goodwine
was the CO; from July 15, 2004, until October 26, 2004, Brian Mulcahy was
the CO; and then from October 26, 2004, until the contract was terminated on
June 17, 2005, Lorri Lowther served a second stint as CO. The CO was
assisted by a COR who also carried the title of Project Executive. The first
COR was Robert Sanders from July 2002 to October 2, 2002, then Michael
(continued...)

9
 D. Terms of the Contract

Through M002, the terms of and attachments to the solicitation were
made part of the contract pursuant to which KI agreed to build the embassy.
In addition, it provided the following with respect to pricing:

Kullman Industries [sic] proposal of $60,730,000 dated
September 30, 2002[,] is hereby accepted by the Government.
The Contractor shall perform Phase II design, construction and
fabrication of the new U.S. Embassy compound in Dushanbe,
Tajikistan in accordance with contract number SALMEC-02-C-
0025, as modified heretofore. This work is to be performed for
a Guaranteed Maximum Price (GMP) of $50,730,000, plus an
allowance of $10,000,000 for Transportation. The GMP will be
evaluated and a fixed price for phase II will be negotiated upon
completion of Phase I of this contract. A written Notice to
Proceed must be issued prior to performance of Phase II
services.

JX 3 at 1. The following provisions regarding price were also included in or
attached to the solicitation and were thereby incorporated by reference into
M002:

B.1 PRICING
B.1.1 The Contract Price includes all labor, materials,
equipment, and services necessary to accomplish the design and
construction required by the Contract Documents, including
applicable customs duties, transportation to the site, storage,
premiums for insurance and bonds required by the Solicitation
Documents and/or the Contract Documents, permits, license,
and inspection fees, and all other items called for by the contract
or otherwise necessary for performance of the contract. The
Contract Price may be adjusted only by a written Contract
modification signed by the Contract Officer.

7
(...continued)
Ross served in this position from October 2, 2002, until January of 2004, and
lastly from January 2004 through June 17, 2005, Sharmeena Salam-Haughton
was employed in this capacity.

10
 B.1.2 The contractor shall complete all work, including
furnishing all labor, material, equipment and services as called
for and required by the terms and conditions of this contract
document and all attachments hereto. The maximum time
allowable for performance has been identified on the SF Form
1442 at the time of Request for Proposal (RFP) Issuance. The
actual time set for performance and completion shall be
negotiated and set forth in the contract at time of award. The
price is firm fixed-price and shall include all labor, materials,
overhead and cost for insurance required by Section/Paragraph
I.42, 52.228-3, Workers’ Compensation Insurance (Defense
Base Act).
....
B.2 CONTRACT PRICE - CONTRACT LINE ITEM
NUMBERS (CLIN)
PROJECT TITLE: Dushanbe NOB
0001 The contractor shall complete all work, including
furnishing all professional services, labor, material, equipment
and services, unless otherwise specified herein, required under
this contract for the following firm fixed price and within the
time specified herein. This price shall include all labor,
materials, overhead insurance and fees, and profit.
....
B.3 TYPE OF CONTRACT
This contract is a Firm Fixed-Price payable entirely in the
currency indicated on the SF1442. No additional sums will be
payable on account of any escalation in the cost of materials,
equipment or labor, or because of the contractor’s failure to
properly estimate or accurately predict the cost or difficulty of
achieving the results required by this contract. . . . Changes in
the contract price or time to complete will be made only due to
changes made by the Government in the work to be performed,
or by delays caused by the Government.
....
B.5 COST OF MATERIALS/EQUIPMENT
The cost of any materials or equipment required in conjunction
with the services rendered herein shall be included in the
proposed firm fixed-price.

JX 1 at 13-14.

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 The SOW, which is Section C of the solicitation, includes the following
concerning geotechnical work:

The Contractor shall engage the services of a geotechnical
consultant to perform all necessary geotechnical work for the
project. . . . The Contractor’s geotechnical engineer shall review
all available geotechnical information provided in the Contract
package and become familiar with the soil and site conditions at
the project site by visiting the site. During the site visit and in
subsequent phases of the project, the Contractor shall examine
and/or verify the information provided and obtain any additional
information to complete the design and construction of the
project. The Contractor remains solely responsible and liable
for design sufficiency and should not depend on reports
provided by the USG as part of the contract documents.

JX 1 at 26. Additionally, the SOW provides,

The geotechnical consultant shall be consulted during the site
design to provide recommendations and design for site retaining
structures, ground modification[] methods, pavement structural
design, and subsurface drainage.

JX 1 at 31. The SOW continues with the following directions about the
geotechnical consultant’s role in the project:

The geotechnical consultant shall continue providing services
during construction, especially during the construction of
foundations, pile loading test, ground modification, retaining
systems, etc. to confirm the recommendations provided during
the design stage of the project.

JX 1 at 34.

Pursuant to Section F of the contract, KI was required to submit a report
detailing its geotechnical investigation 57 days after the date of the first Notice
to Proceed. Similarly, it was the contractor’s responsibility to visit “the project
site and verifying all pertinent site conditions.” JX 1 at 83. The contract also
referenced an attachment, J.3.7 “Dushanbe Geological Overview,” which
provided the following general description of the geotechnical conditions:

12
 From the engineering and geotechnical standpoint, the site is
suitable for the proposed NOB. However, due to the geologic
setting of the entire city as well as the high seismicity of the
area, additional site development costs may be anticipated
including sub-grade preparation and foundations, re-grading/fill
of the site, and utilities.

Dushanbe is located in a region in which collapsible silt/clay
soils occupy the upper 15-18 meters. These soils are very
sensitive to moisture and require special foundation sub-grade
preparation. Below the silt/clay layer, alluvial sand and gravel
soils extend to a depth greater than 50 meters. The permanent
water table may exist at much shallower depths at this site. For
a NOB up to 3 stories in height, a mat foundation is anticipated
as the most likely system to support the proposed structure. For
heavier structures, piles may be required. Both systems are
commonly used in Dushanbe. Further geotechnical studies are
required to confirm our findings. A thorough geological
investigation of the site is currently in progress and will be
completed within the next few weeks.

According to the local Geologic and Foundation Institute, the
site is located in seismic zone 9 (per Soviet standards). OBO’s
level of seismicity defines Dushanbe as zone 4 per UBC.
Regardless, the seismicity level is considered very high and any
future structures need to be designed accordingly. As compared
to other locations, the site has a thicker overburden of
collapsible soils.

JX 11 (emphasis added); see also JX 1 at 109.

The contract incorporated FAR 52.211-12, giving the government
authority to assess liquidate damages, which initially were set at $8,500.00 per
day. With respect to excusable days of delay, it provided that “[t]he Contractor
will be allowed time, not money, for excusable delays as defined in FAR
52.249-10.” JX 1 at 48. Excusable delays include, among other things, “(1)
acts of God or of the public enemy, (2) acts of the United States Government
in either its sovereign or contractual capacity, (3) acts of the government of the
host country in its sovereign capacity, . . . (11) delays in delivery of
Government furnished equipment and (12) unusually severe weather.” JX 1

13
at 48.

Division 1 of the contract, which was included in the solicitation
pursuant to M001, contained provisions about security details, temporary
utilities, and the schedule of values. The contract required the contractor to
invoice the government for periodic payment based on the percentage of work
completed for each line item on a schedule of values developed by the
contracting officer and to include on the invoice a certification stating that the
contractor had paid its subcontractors and suppliers.

The security measures described in Division 1 were necessary to
maintain the integrity of the CAA. One of the ways to ensure the security of
the CAA is to limit access by “[u]ncleared personnel” unless “accompanied by
a [Construction Surveillance Technician] CST.” JX 14 at 5. In order for
foreign nationals to be cleared for access to work on the CAA, they had to
“submit to a background investigation and be approved by the [Site Security
Manager] SSM before access is granted to Project Site.” JX 14 at 4. If the
foreign national’s application for access to the site was pending but not yet
approved, the Site Security Manager (“SSM”) had discretion to permit the
foreign national to perform limited work on site.

In addition to describing who could access the CAA during
construction, and in order to maintain the integrity of the CAA once built,
Division 1 also set out procedures for securely producing and shipping to the
site the materials incorporated into the CAA.8 Once the modular panels that
were to be used as floors and walls were built in New Jersey and certified as
compliant with relevant security precautions, containers of materials or
modules traveled to the project site in Dushanbe, where security officers would
“de-certify” the container. This involved the following: “1.) inspection of
container exterior and dunnage wall, 2.) removal of dunnage wall by
contractor, 3.) removal of all material by contractor in accordance with site
security procedures and 4.) inspection of interior of container by decertifying
officer.” JX 15 at 9.

Once the secure shipment was inspected it would be moved “to [a]
secure storage area until required for installation in CAA.” JX 14 at 16.

8
The details of secure shipping and production are classified and will not be
described.

14
Elsewhere the contract provided that “[t]he Government shall consider
noncompliance with the security regulations by the Contractor or his
employees, subcontractors, suppliers, etc. to be sufficient grounds for
termination of the contract for default.” JX 1 at 84.

The government also maintained the right, after a secure shipment was
complete, “to determine whether products have been compromised and
therefore cannot be used in a CAA or contiguous space. Where such
compromise results from the Contractor’s failure to comply with security
procedures, the Contractor shall bear entire cost associated with rectifying
compromise and restoration of fundamental secure nature of product(s)
affected.” JX 14 at 7-8. Division 1 provided, however, that “[i]n instances
where authorized work must be disassembled, uncovered, or demolished to
accommodate inspection and then reassembled, recovered, or rebuilt, resultant
costs of such actions shall be borne by Government where inspected work is
found to be in conformance with Construction Specifications and security
requirements.” JX 14 at 19.

Regarding utilities, Division 1 required the contractor to provide
temporary water, sewer, electrical power, and telecommunications, throughout
the course of the project. The contractor was directed to “[c]onnect to existing
franchised utilities for required services, where reasonably possible.” JX 12
at 5. “At the earliest reasonable date, [the contractor should] connect with
permanent utility lines and service connections, and remove temporary
utilities/services; comply with the Project Director’s requests.” JX 12 at 6. In
addition to temporary utilities, the contractor was obligated to provide
temporary office facilities and equipment, including computer systems.

E. Performing Phase I

In November of 2002, KI submitted an initial design, which the
government rejected in part because the design for the foundation was
deficient. KI then sent LBG representatives to Dushanbe in January of 2003
to test the soil conditions and recommend a foundation design. LBG issued a
draft report in late March that agreed with the SANIIOSP findings and
recommended the same approach contained in the earlier SANIIOSP
geotechnical report, i.e., attempting to compress the foundation soils by an
extensive flooding and de-watering system.

DOS eventually approved KI’s Phase I plan to use a modular approach

15
to constructing most of the embassy structures. The NOB, for example, was
assembled of six sided metal boxes, approximately 10 feet wide, 10 feet high,
and 30 feet long. Each module weighed anywhere from 30,000 to 100,000
pounds. These boxes were fabricated at KI’s New Jersey plant in a process
that started with constructing a six-sided steel frame, pouring concrete in the
base, building walls, and then adding finishes like drywall, flooring, and
infrastructure for utilities. Then the modules were shipped via boat and train
to Dushanbe where they were stacked up on the foundation to constitute the
building. Once the module was hoisted into place with a crane, KI employees
would weld them together. The process would repeat as more stories were
added to the building. Over 200 modules were used in the construction of the
Dushanbe NOB.

III. The Dushanbe Project: Phase II

A. Continued Negotiations Over Price

Although M002 reads as if it were a complete agreement by the parties,
KI took the position early on in contract performance, and argues in this
litigation, that M002 left room for the parties to revisit the contract price,
specifically in connection with what it would cost plaintiff to do the
preliminary work (geotechnical) for the foundations. Mr. Lefkus testified that,
when KI agreed to M002, it did so with the understanding that the parties
would renegotiate a firm fixed price once Phase I was complete and that KI
was not at risk because, even though it had agreed to perform the project for
a GMP of $60.7 million, that did not obligate KI to a specific type of
performance when there was no agreed upon design. Mr. Lefkus believed that
the sole function of M002 was to secure the funding that was available in
fiscal year 2002, which would have otherwise lapsed on October 1, 2002. This
is contrary to Mr. Sutherland’s understanding that under M002, the
government could require the contractor to perform the contract as written for
the agreed upon price.

Mr. Sutherland was willing, however, to discuss an adjustment in price.
In an effort to negotiate a mutually acceptable price, Mr. Sutherland met on
May 1, 2003, with KI representatives, including Alan Rand,9 who was newly

9
Mr. Rand had proposed $69.5 million as a firm fixed price for the contract
(continued...)

16
appointed by KI as its Vice President for Federal Contracts, and who was
given responsibility for overseeing the Dushanbe project. In a letter dated May
2, 2003, Mr. Rand, wrote the following to Mr. Sutherland:

As we discussed on May 1, we will treat the unknown and
unforeseen geo-technical issues as a change to the base line
price comparison. Therefore, we have not included a price for
this work in the attached Final Price spreadsheet. We are,
however, prepared to provide OBO with a “hard” number as part
of a change to the base line price for this project.

JX 191 at 2. Mr. Sutherland responded by referring to the agreement
established in M002. He wrote the following in a May 6, 2003 e-mail to Mr.
Rand:

On September 30, 2002 we reached a mutual agreement on
$60,730,000 for Phase II design, construction and fabrication.
This consisted of a promise by KI to complete all work required
for a guaranteed maximum price (GMP) of $50,730,000, plus an
allowance of $10,000,000 for transportation. . . . While the
Government was willing to take the risk that transportation costs
could move up or down as an allowance cost, we fully expected
KI to perform the work at or below the guaranteed maximum
price as promised in accordance with the terms of the contract.

JX 195 at 3.

Mike Ross, the OBO Project Executive who worked with Mr.
Sutherland on the Dushanbe project, joined the conversation by e-mailing Mr.
Rand: “When John [Lefkus] submitted his proposal on Sept. 30, he took no
exceptions to the contract. Now, 7 months into the project, I’m not sure if
there is anything he doesn’t take exception to.” JX 195 at 2. Mr. Rand
responded to both Mr. Sutherland and Mr. Ross that “I hope that I have been
clear with regard to the items that are not included in our price i.e. . . . geotech

9
(...continued)
on April 21, 2003.

17
work.” JX 195 at 1. On May 7, 2003, Mr. Ross wrote10 to Mr. Rand the
following:

You’re not at all clear. You’re [sic] proposal of Sept. 30, 02
provided a guaranteed maximum price for the construction of
the building and took no exceptions to the contract as you are
mentioning below. The only allowance you mentioned in the
proposal was for transportation. If the geotech work turns out
to be a differing site condition you will pursue it as such. Your
delays in completing your foundation analysis are your
responsibility.

JX 195 at 1.

Meanwhile, Mr. Prior, Mr. Sutherland, and Mr. Ross agreed among
themselves to reserve $2 million in funding to be used in the event that KI
proved that it was entitled to an equitable adjustment for differing site
conditions. Prior to the in-person negotiations that occurred in May 2003, Mr.
Sutherland prepared a “pre-negotiation plan,” which states that “the
Government will take the position that [the geotech] contingency is covered
by the Differing Site Conditions clause of the contract” when KI requests, as
anticipated, “$2 million for unknown geotechnical conditions.” JX 1341 at 3.

Final negotiations concerning Phase II were held on May 8, 2003, in
Arlington, VA. Mr. Sutherland, Mr. Prior, and Mr. Ross represented the
government and Mr. Lefkus, Mr. Rand, and two others attended on KI’s
behalf.

Following the May 2003 negotiations, Mr. Sutherland recorded that the
parties agreed to convert the contract from a guaranteed maximum price to a
firm fixed price and to raise the contract price by $2 million by changing the
$10 million transportation allowance into a $12 million fixed price item. JX
1342 at 3. He also wrote, “The Contractor’s proposed $2 million for unknown
geotechnical conditions was considered by the Government to be an
unjustified contingency and was rejected.” JX 1342 at 3 (Price Negotiation
Memorandum). That change was later confirmed in M004, discussed below.

10
Mr. Lefkus, Eduardo Gaarder, Mr. Prior, and Mr. Sutherland were copied
on this e-mail. JX 195 at 1.

18
 The third interim notice to proceed was issued by Mr. Sutherland on
May 8, 2003, which authorized KI to “[p]roceed with mobilization and site
preparation, not to exceed $1,000,000.” JX 198 at 1. Thus, the project moved
forward as negotiations over price continued in May 2003.11

In a May 14, 2003 e-mail to employees of Greenway Enterprises, KI’s
main subcontractor on the Dushanbe project, Mr. Kosinski explained KI’s
understanding of how the parties would address the geotechnical work in light
of the negotiations in the following way:

We have agreed to approach the geotech remediation work as a
“separate issue” in terms of both cost and schedule. This will be
addressed later on with a change order. What this means to you
is that for the time being, you need to submit your schedule
based on the assumption that we do not have to do any of the
geotech prep work. . . . Based on this we will back out the
$874,958.00 from your contract amount for the geotech, and the
revised baseline schedule will show a contract completion of
June 24, 2004. Once the actual cost and schedule impacts are
confirmed, we will submit a change order to OBO for the
additional cost and time.

JX 200 at 1.

Mr. Sutherland also understood that the geotechnical work would be the
subject of a possible change order, although he probably had a different
understanding than KI representatives as to what that meant. As he testified
at trial:

The government’s position was always, unless you show
us that there’s some sort of differing site conditions, we’re not
going to allow that. So we stuck with that position, and, as far
as the government was concerned, they were never able to prove
that, though – we never added it during negotiations, even
though Kullman would have liked to have seen an extra $2

11
Chris Matise, KI’s Project Manager, arrived on site in Dushanbe on May 12,
2003. KI submitted its detailed project schedule on May 15, 2003, which was
later approved by the government on May 30, 2003.

19
 million for that contingency. That’s exactly what it was. It was
contingency in our eyes.

We felt, well, we should prepare for the contingency, but
since they haven’t yet demonstrated to us that it is a differing
site condition, we’re not going to put it in the contract.

Tr. 2216-17 (Sutherland).

The final adjustment to price was captured in M004.12 M004 made
several changes to the contract. As discussed above, the original guaranteed
maximum price of $60,730,000 was changed to a firm fixed price of
$62,700,000.00, which resulted in an overall increase in the total contract price
of $1,970,000. Also, the contract completion date was extended to June 20,
2004. Finally, the potential daily liquidated damages was decreased from
$8,500 to $3,380.

M004 also incorporated other documents into the contract. First, it
referenced a May 1, 2003 classified document on the “Dushanbe Chancery
Ceiling Heights” given to KI by Mike Ross. Second, the May 29, 2003 letter
from KI was also incorporated into M004. In this letter, John Lefkus
memorialized the following understanding:

Final [notice to proceed] to be issued by June 1st or before. This
references DS Certification. Contract will be adjusted if the
[notice to proceed] is not issued by then. Contract is extended
65 days for a June 20, 2004 completion. This extension takes
in[to] account the weeks to the [notice to proceed] and previous
suspension and delays.

JX 5 at 5. The letter continues, “The government acknowledges that with the
exception of a single DS condition, no other outstanding issues remain for DS
Certification.” JX 5 at 5. KI’s letter does not mention the geotechnical issue.

Although M004 was not signed by Mr. Sutherland until August 7, 2003,

12
M003, which is dated December 12, 2002, clarified that certain work had to
be performed by workers that had obtained security clearance at the secret
level. JX 4 at 1.

20
and Mr. Lefkus on September 16, 2003, it was given an effective date of May
29, 2003. May 29 was also the date that KI was issued the unlimited notice to
proceed. Plaintiff makes much of the fact that KI waited to execute M004
until it submitted the differing site condition request for equitable adjustment,
but we attach no contractual significance to that fact.

B. Geotechnical Work

1. Breaking Ground: The Geotechnical Work Begins

On June 1, 2003, Catherine Wilkins arrived on site to serve as the OBO
Project Director. There was a ground-breaking ceremony held at the site on
June 10, 2003. General Williams, Suzanne Conrad, Antonio Delgado, Thomas
Quinzio, Mike Ross, Kevin Sarring, Barbara Richter, Jay Neustel, and Bob
Cult from OBO and Mr. Lefkus, Mr. Rand, and Mr. Kosinski from KI were in
Dushanbe for the ground-breaking ceremony and the pre-construction
conference.

Even after the work began on site, the parties continued to quibble over
how the geotechnical work would be financed. As the newcomer, Ms. Wilkins
was told by KI that the geotech “work is specifically not included in [KI’s]
contract at this time and that they are preparing a price proposal to be
negotiated.” JX 219 at 1. In light of KI’s assertion, Ms. Wilkins e-mailed Mr.
Sutherland and Mr. Ross on June 18, 2003, to reaffirm that the government’s
position was that “the government expects the contractor to proceed with the
construction, and, if they feel that the geotech work is not in their contract, to
file a request for equitable adjustment.” JX 219 at 1. Mr. Ross responded on
June 25 with the following:

The government does not accept any claim from the
contractor that the foundation is not in their contract. They have
never given us anything in writing to that effect nor have they
mentioned an exclusion. They have a design-build contract that
includes putting the building on a competent foundation.

....

Further, it has been explained to them that any request for
equitable adjustment must be presented to the contracting officer
with a comprehensive schedule and cost analysis attached.

21
 Otherwise we have nothing to talk about.

JX 224 at 2. After receiving this message, Ms. Wilkins wrote back to Mr.
Ross informing him that the contractor was threatening to suspend work until
there was a signed contract modification addressing this issue. Mr. Ross then
e-mailed Mr. Alan with the following note:

What Catherine is telling me is NOT what we agreed. You told
me at site last week that you would proceed with the foundation
work and once you determined what, if anything, was a differing
site condition, you would apply for a request for equitable
adjustment.

As of now, the Government does NOT agree that this work is
not in your contract and if you delay the project and fail to prove
otherwise, you’re going to be on the hook for making up the lost
time.

I would suggest that you get rolling with the foundation work
and start putting together your RFEA if you believe you are
entitled to one.

JX 224 at 1. Mr Sutherland echoed these sentiments two days later when he
e-mailed Mr. Rand and instructed KI to “Get Going!” with the site work. JX
225 at 1. In this e-mail, Mr. Sutherland reminded Mr. Rand of KI’s obligation
to prosecute the work diligently. Mr. Sutherland wrote, “I have yet to see any
evidence that there are in fact any differing site conditions relating to soils or
any other geotech concerns. So far it’s been speculation. The contract does
not provide for any delay of work based on unsupported speculation.” JX 225
at 1.

Despite the foregoing, Ms. Wilkins’ Project Director Summary for July
2003 characterized contractor relations and customer satisfaction as “good.”
JX 60 at 1.13 The project status was characterized as “green,” or positive, even
though “[c]onstruction activity in the field has been slow to get started.” JX

13
In this document, Ms. Wilkins also reported that the contract completion
date was June 20, 2004, although the “[s]tatus of mod #4 not confirmed.” JX
60 at 2.

22
60 at 1. Ms. Wilkins recorded that excavation, grubbing, grading, and soil
wetting had begun. JX 60 at 2. Joseph Allen, KI’s Site Superintendent who
worked on the geotechnical and soil remediation efforts, recalled the
following:

[T]o remedy those [poor and collapsible] soil conditions, there
were some processes we had to do after we excavated to get the
soil prepared for the load that was going to be put on it . . . .

So it was a process of excavating, flooding the area,
having it hold standing water. And – and that was for, if I
remember correctly, I think it was for 28 days was what the
requirement was. And then you remove that, you excavate a
portion of it, compact it, test the soil.

Tr. 824-25. KI sent the test samples to LBG for analysis. KI repeated this
process for several months with little resulting soil settlement. LBG released
a report, JX 420, in March of 2004 that concluded the soils had settled only
2 centimeters as a result of the compaction efforts.

2. KI Submits a Request for Equitable Adjustment and
Then Signs M004

Before the results of the settlement efforts were known however, on
June 9, 2003, Mr. Ross sent KI the cost estimate forms to complete and submit
along with the request for equitable adjustment (“REA”) concerning the site
conditions. KI submitted its differing site condition REA to Mr. Sutherland
on August 15, 2003. The REA asserted that the geological conditions were
“extreme and differ[ent] from standards applied at the time of the initial
contract award/[notice to proceed] and during negotiations.” JX 22 at 3. In
the REA, KI requested a monetary adjustment of $3,032,915 and a time
extension that would move substantial completion to November 15, 2004. The
time extension was requested because KI estimated that “an eight-week time
period” was necessary for soil subsidence. JX 22 at 6. In its submission, KI
asserted that the equitable adjustment was warranted because “during final
contract negotiations, all costs and schedule impact that relate to the
geotechnical work were specifically excluded from the negotiated price
pending issuance of the final geotechnical report, completion of the
structural/geotechnical design effort, and cost and schedule analysis.” JX 22
at 3.

23
 Mr. Lefkus signed M004 on September 16, 2003. At the time that KI
submitted its REA and executed M004, the remedial geotechnical work was
not included in the Schedule of Values. JX 214, JX 230, JX 237, JX 250; see
Tr. 2442 (Lefkus) (“[W]e had not yet acknowledged the contractor’s obligation
to do those [geotech] activities because they did not appear on the schedule.”).

3. The Site Work Continues

As August 2003 came to a close, Ms. Wilkins described the project
status as “yellow,” and the contractor performance as “significantly behind
schedule.” JX 61 at 1. Ms. Wilkins recorded that “[e]xcavation was
completed during the month of August at the building footprints” but “[s]oil
wetting operations continued at the perimeter wall foundations.” JX 61 at 1.

a. Delay

In September 2003, Ms. Wilkins’ characterization of the project status
changed to red, which she testified meant that there was a serious problem
because the contractor was behind schedule. KI was so far behind schedule
at this point that Ms. Wilkins wrote, that KI was “unlikely to complete within
the contract performance period.” JX 62 at 1. She estimated that the job was
20.35% complete. JX 62 at 2. Ms. Wilkins recorded that “[a]ctivity at the site
continues to focus on the geotechnical work required to prepare the soil prior
to construction of the foundations.” JX 62 at 1.

b. Geotech is Added to the Schedule of Values

In order to receive periodic compensation for work performed, KI
submitted invoices to the agency. It billed for the percentage of work
completed for each line item on a Schedule of Values (“SOV”). The SOV
submitted by KI with the August 2003 invoice showed a line item of $12
million for transportation and did not include a line item for geotechnical
work. JX 250. The September 2003 invoice is the first one submitted by KI
that included a line item for geotechnical work, valued at $3,032,915. This
entry corresponded with a reduction in the transportation line item in the
September 2003 schedule of values, which became six new line items titled
“Transport Modules from Port to Site” with a total value of approximately $8.8
million. JX 270 at 15.

Although KI had initially excluded line items for geotechnical work in

24
the SOV,14 inclusion of these line items became the topic of discussion at the
end of September 2003. Mr. Ross wrote the following to Mr. Rand on October
1, 2003: “Per our meeting with Anne last week, you were going to adjust your
schedule to reflect the geotech work. Those activities and there [sic] values
should then be exported to your schedule of values.” JX 119 at 897.

14
The SOV originates with the contractor and is then reviewed and approved
by the government. Tr. 209 (Farley). The contract states:

Before the first progress payment under this contract becomes
due, the contractor shall prepare a Detailed Estimate for
Progress Payments itemizing the Contract Price in the form and
in such detail as is required by the Contract Documents. The
values in the Detailed Estimate will be used as a basis for
determining progress payments, but will not be conclusive as to
the amounts due the Contractor or as to the value of changes in
the work. The Contractor’s overhead and profit shall be
prorated throughout the life of the contract.

JX 1 at 60. The contract documents further prescribe:

1. The Contractor shall submit applications for progress
payment monthly.
2. Monthly Progress Payment applications shall be:
a) Substantiated by progress report submittals, as
specified.
b) Consistent with previous applications.
c) Accurately coordinated with the Schedule of
Values produced by the progress cost loaded
schedule process defined in Section 01314,
Project Schedules.
d) As directed by the Project Director,
coordinated with required meetings, inspections,
certifications, and similar actions.
e) Submitted subsequent to completion of
specified prerequisite work elements for which
partial payment has been requested.

JX 57 at 14-15.

25
 KI did include a new group of line items under the heading of
“GeoTech” that totaled $3,032,915 in its September invoice. JX 270 at 12-13.
The bottom line contract value did not change in order to accommodate these
new line items. Rather, the transportation budget of $12 million was broken
down into smaller line items that then totaled to just short of $9 million. In
other words, money was moved from transportation to geotechnical work,
although the overall contract amount remained the same. Mr. Rand testified
that he discussed this change with Mr. Ross and Ms. Wilkins and obtained
government approval to move funds from the transportation line item to the
newly created line item for geotechnical work.

Around the same time that the geotechnical work was included within
the SOV, representatives from the government met with members of KI to
discuss the geotechnical issues raised in the REA. JX 24 at 1 (stating the
meeting occurred on October 16, 2003). At this meeting, “KI/LBG
representatives confirmed that soil samples brought back to the United States
and tested were consistent with the [SANIIOSP] report.” JX 24 at 4.

At the end of October 2003, Ms. Wilkins recorded in her Project
Director’s Summary that progress had been made on the geotechnical work,
but the soil wetting and monitoring phase was not complete. JX 63 at 1. KI
also prepared a monthly progress report for October which stated that the
contractor “continue[s] to anticipate approximately two months of field
activities that relate almost exclusively to the geotech effort.” JX 94 at 1. KI’s
prediction proved true as Ms. Wilkins reported in both her November and
December Project Director’s summaries that the contractor continued to flood
and monitor the soils. JX 64 at 1, JX 65 at 1. As indicated above, after
months of soil wetting, excavation, fill and drying, there was virtually no
settlement.

c. The Government Denies the REA

On November 12, 2003, Mr. Sutherland sent a letter to KI denying the
REA. JX 24 at 1. The letter provided the following:

Section C of the contract requires the Contractor to perform
geotechnical services in Dushanbe. Since execution of the
contract, the Government has not made any changes to the
contract requirements regarding performance of geotechnical
activities. The contract does not contain any exceptions or

26
 special provisions providing for additional consideration to
perform required geotechnical services. As a result of reviews,
evaluations, and discussions, the Government has determined
that the REA does not support any adjustment to the contract
price or performance schedule. Therefore, the REA is denied in
its entirety.

JX 24 at 1. Additionally, Mr. Sutherland noted that KI received “Section C”
of the contract on July 2, 2002, which included clauses C.2.8 and C.4.2.5 that
included geotechnical activities within the scope of work, and that the July 12,
2002 solicitation included attachment J.3.7, which should have put KI on
notice of the potential geological issues at the site. Mr. Sutherland also wrote,

The RFP and the contract contain FAR clauses 52.236-3, Site
Investigation and Conditions Affecting the Work (APR 1984).
The clause states that the Contractor has investigated and
satisfied itself of conditions that can affect the work or its cost,
including ‘the confirmation and conditions of the ground.’ The
clause goes on, ‘. . . . The Contractor also acknowledges that it
has satisfied itself as to the character, quality, and quantity of
surface and subsurface materials or obstacles to be encountered
insofar as this information is reasonably ascertainable from an
inspection of the site, including all exploratory work done by the
Government . . . failure of the Contractor to take the actions
described and acknowledged in this paragraph will not relieve
the Contractor from responsibility for estimating properly the
difficulty and cost of performing the work without additional
expense to the Government . . . The Government assumes no
responsibility for any conclusions or interpretations made by the
Contractor based on information made available by the
Government.’

JX 24 at 3.

Mr. Sutherland noted that “KI’s decision to hold off sending a
geotechnical engineer to Dushanbe until January 2003 showed negligence and
likely contributed to delays.” JX 24 at 4. Regarding the September 30, 2002
GMP, Mr. Sutherland wrote, “Although the final offer did include some
mutually agreed upon conditions, it did not include any conditions regarding
geotechnical issues.” JX 24 at 4 (underline in original). Mr. Sutherland

27
concluded, “Based on field reports and observations, it is believed that
Kullman Industries failed to prosecute the geotechnical work diligently, as
required by [the] contract.” JX 24 at 8. DOS architect Vassilios Magginas
wrote in the analysis attached to Mr. Sutherland’s letter, “I do not see any
reason why OBO has to pay for something extra for a design decision made by
[KI] and, overall, is a requirement of the project.” JX 24 at 13.

4. Retainage and Liquidated Damages

The government began retaining a portion of KI’s progress payments
in April of 2003 pursuant to Federal Acquisition Regulation Part 52.232-5(e)
(2003), which provides,

(e) Retainage. If the Contracting Officer finds that satisfactory
progress was achieved during any period for which a progress
payment is to be made, the Contracting Officer shall authorize
payment to be made in full. However, if satisfactory progress
has not been made, the Contracting Officer may retain a
maximum of 10 percent of the amount of the payment until
satisfactory progress is achieved. When the work is substantially
complete, the Contracting Officer may retain from previously
withheld funds and future progress payments that amount the
Contracting Officer considers adequate for protection of the
Government and shall release to the Contractor all the remaining
withheld funds. Also, on completion and acceptance of each
separate building, public work, or other division of the contract,
for which the price is stated separately in the contract, payment
shall be made for the completed work without retention of a
percentage.

The government’s rationale for the initial withholding was unsatisfactory
progress with the design. Then, as geotechnical work threatened satisfactory
progress on the rest of the project, the government once again justified
retaining a small percent of KI’s progress payments.

Mr. Rand wrote to Mr. Sutherland on December 5, 2003, describing the
impact of the government’s decision to retain part of KI’s progress payments:

[T]he recent lack of payment and withholding by the
government has created an intolerable condition . . . .

28
 Withholdings for non-payment of applications not in terms
(September and earlier) is over 30% of the [sic] Kullman’s
undisputed earnings. I believe that the lack of payment for
approved undisputed work technically constitutes a breach by
the government. . . .

This lack of cash flow has a direct negative impact on the
project team and the project’s success. . . . Professional
consultants along with foreign and domestic subcontractors
struggle with large outstanding balances for work that has been
performed and approved.

....

During the meeting, Mike Ross made me aware of OBO’s
rationale for withholding 10% of each of Kullman’s invoices.
His rationale is schedule related and is directly attributed to the
geotech work now taking place. If we were able to show a
geotech recovery plan related to schedule, all sums currently
retained would be returned to Kullman.

JX 303 at 1. Throughout the contract, the government continued to
periodically exercise its right to withhold up to 10% of the value of KI’s
invoices and at no time did the government exceed its authority to collect
retainage pursuant to the FAR. The total retention withheld by the government
at the end of the contract was $2,187,022.

On June 18, 2004, Lisa Goodwine, the contracting officer at the time,
sent Mr. Rand formal notice that the government intended to assess liquidated
damages in the amount of $3,380 per day beginning on June 21, 2004, because
the contract completion date was June 20, 2004.15 JX 539; see Tr. 447-48
(Lowther). However, we find no reference to a formal assessment of
liquidated damages, and the government has not made liquidated damages part

15
The letter was actually signed by James G. Thomas, Jr., as the CO, and was
sent by Lisa Goodwine. However, the parties stipulated that Lisa Goodwine
was the CO for the Dushanbe project from June 17, 2004, until July 15, 2004.
Ms. Lowther explained that Mr. Thomas was the Senior Contracting Officer
in the division.

29
of its counter-claim here.

C. Security Breach & Mold Remediation

Once the foundations were in place, the construction of the Embassy
progressed until a problem was encountered with the CAA within the NOB.
Unlike the other modules within the NOB, the original intent of the parties was
that the modules comprising the CAA would be built in segregated facilities
in New Jersey by screened employees under DOS observation.16 What the
parties had to accommodate, however, is that because the CAA is room within
a room (the space between the interior room and the full expanse of the CAA
accommodates periodic inspections to verify the security of the structure), the
CAA module needed to have a ceiling height of twelve feet. The maximum
height of a module that could be shipped, however, was ten feet. As one might
expect, some of the details about this area within the Embassy are classified.
Not only is information regarding the CAA restricted, but strict security
measures were followed throughout the project in order to preserve the
integrity of this space.

The security problem created by the adaptation of the Standard Embassy
Design (“SED”) to modular construction was anticipated during Phase I. See
JX 174 (March 20, 2003 e-mail discussing CAA ceiling height design issues).
Mr. Lefkus, Mr. Rand, Mr. Sutherland, Mr. Ross, Eduardo Gaarder, Patricia
Regalo-Warren, Branch Chief within OBO, and others representing either KI
or the government met on April 1, 2003, to address the security concerns
identified during the design phase. Mr. Sutherland wrote a memorandum after
the meeting which recorded the following:

The contract is based on Standard Embassy Design (SED)
documents and attachments thereto. Design submittals [sic] to
date show the ceiling at less than the 12-foot height. The
Government maintains that the contract documents require a 12-
foot ceiling. Kullman points out that Section C of the contract
states “. . . (SED) shall be modified as necessary to execute
using off-site modular technology. . .” Kullman explained that

16
The parties called the screened workers “Cleared American Workers” or
“CAW” and the DOS employees who were tasked with observing were
reffered to as “Construction Surveillance Technicians” or “CST.”

30
 it would not be practical to have the 12 foot ceiling for modular
construction because of transportation limitations, involving
oceanic shipping, rail cars in Europe, high-risk areas, low
tunnels, and other reasons. Alternative possibilities were
discussed.

. . . . Pending resolution of the ceiling issue, the Contracting
Officer has suspended all work under the contract.

JX 179 at 1. Three days after this meeting, on April 4, 2003, DOS approved
KI’s revised Construction and Transit Security Plan. This plan was originally
drafted on October 30, 2002, and revised on March 6, 2003. It included the
following language:

The goal of this plan is to facilitate the project schedule by
limiting the program to actual CAA area(s) and implementing
security measures to maintain an acceptable level of protection
. . . . [I]t is the contractor’s understanding that the CAA area(s)
impact the second and third floor modules on one specific
portion of the NOB.

JX 153 at 4. The plan went on to state that

The unique nature of modular construction lends itself to the
security aspects of this project. We can readily identify and
segregate the modules requiring special protection. Unlike
conventional construction, where contiguous areas are
connected throughout the construction process, modular
construction allows for the separation of modules containing
sensitive areas to be assembled under segregated, controlled
conditions. With modular construction, floor and ceiling
structures are not shared elements; therefore the need to control
vertically adjacent areas is eliminated.

JX 153 at 4-5. When the government approved the Construction and Transit
Security Plan, it also noted that KI had not yet submitted a Transit Security
Plan, which presumably would describe in detail the plan to transport modules
and materials from New Jersey where they were assembled to Dushanbe.

At trial, several witnesses testified that KI did indeed create such a plan

31
and that the government approved it. See, e.g. Tr. 2781-83 (Algire). The
shipping plan, however, was classified and Mr. Kullman testified that KI was
required to return to the government all classified documents once it was
terminated. Tr. 1766-67. While witnesses confirmed that the plan listed which
modules and materials were to be shipped securely, see Tr. 5031 (Charles
Kuehne, Senior Desk Officer for Central Asia and team leader for security
procedures at DOS), the details of the list are unknown to the court because
neither party produced it. Additionally, during trial, the court asked the
government to produce the classified blue prints, shipping lists, and any other
exhibits that might aid our resolution of this issue and the government was
unable or unwilling to do so. This gap becomes important, as discussed below,
because a dispute arose as to whether the materials for the mechanical suite on
the fourth floor of the NOB above the CAA had to be shipped securely.
Because the government was in the best position to produce the secure
shipping list and failed to do so, we draw the inference that the fourth-floor
floor panels were not on the list. See Huthnance v. Dist. of Columbia, 722
F.3d 371, 378 (D.D.C. 2013).

The ceiling height of the CAA was a topic of conversation during the
negotiations leading to M004. M004 incorporated a May 1, 2003 classified
document on the “Dushanbe Chancery Ceiling Heights” given to KI by Mike
Ross. The May 29, 2003 letter from KI, which was also incorporated into
M004 provides the following:

Final [notice to proceed] to be issued by June 1st or before. This
references DS Certification. Contract will be adjusted if the
[notice to proceed] is not issued by then. Contract is extended
65 days for a June 20, 2004 completion. This extension takes
into account the weeks to the [notice to proceed] and previous
suspension and delays.

JX 5 at 5. Finally, this letter acknowledges that, as of May 29, 2003, “DS”
certification was still an outstanding issue.

Mr. Rand and Mr. Lefkus once again met with Mr. Ross and others
from diplomatic security on November 6, 2003, to address this issue. Mr.
Lekus recalled that

we couldn’t achieve [the necessary ceiling height] within a
single module, but our solution was to show them, represent

32
 that, while the third floor module itself could not achieve that
space, that most of that space could be achieved with its
relationship with the fourth floor floor panels, which was for the
mechanical suite.

Tr. 2391. KI brought a proposed solution to this meeting in the form of a
three-dimensional model.17 Although the model was not produced at trial, Mr.
Lefkus described it as a shoe box with lid; “the third floor module looked like
the bottom of a shoe box and the fourth floor panel looked like the top of a
shoe box.” Tr. 2393. The way in which KI proposed to solve the height issue
was by welding extenders on the floor of the fourth floor and then welding that
panel on the ten foot high third floor module. This added approximately two
feet to the standard module. Mr. Lefkus testified that the three-dimensional
model remained in the custody of the government after the meeting. Tr. 2394.
It was not introduced at trial.

When asked whether there was any discussion at the November 6
meeting about how the “lid” would be manufactured and shipped, Mr. Lefkus
responded,

A. Yeah. We understood at that meeting that the third floor,
which was cleared space, was built securely, and the
fourth floor elements, which was mechanical space, was
not built securely.
Q. Did the government understand that?
A. The focus on the meeting was the clearance. I know we
discussed, you know, the fabrication of each spaces, so
I would say they did, but that was further discussed with
their transit security team. Every piece of the building
was approved for transportation. It was either sent
secure transportation or unsecure. So every element in
the building was designated for secure. If the product
was not built secure, you’d never send it secure
transportation. Conversely, if you built something in a
secure environment, you wouldn’t send it unsecured. So,

17
Mr. Lefkus also testified that KI representatives provided “a series of plans”
and the model to illustrate the relationship between the third and fourth floor
in physical form. Tr. 2393.

33
 they’re always related to each other.
The Court: When you say designated, by whom?
The Witness: It’s a process with the government to determine
what spaces they deem to be secure in nature. Some are
easy calls.
The Court: Spaces or mods? Spaces or elements of the
construction –
The Witness: Both, sir. It could be a module or it could be a
container with a product in it. So, anything that got
transported to the site – anything – whether it went in a
container, freight bulk, as a module, there was a
designated way that it was going to be transported.
The Court: Where did that designation originate?
The Witness: It designated through the government’s transit
security team and their site security by reviewing the
plans and determining an approach to transport the
project from our facility to its destination in Dushanbe.

Tr. 2397-98.

On December 10, 2003, Mr. Kosinski e-mailed Mr. Ross and other
government representatives with several attachments regarding general
shipping plans. In a December 9, 2003 letter, which was the first attachment
to Mr. Kosinski’s e-mail, he wrote that the attached “shipping plans have now
been revised to include the specific details requested and direction provided
by the USG [United States Government] during recent meetings and
discussions on this topic.” JX 306 at 2. After briefly describing the shipping
plans for the modules and some of the measures to be employed to ensure the
security of those designated secure modules, Mr. Kosinksi wrote that “[a]s
discussed during our meeting on November 6th, the panelized sections for the
NOB mechanical penthouse spaces and atrium areas do not need to travel with
the modules shipments and may follow alternate routing if desired.” JX 306
at 3. The rest of the attachments described the plans to transport three
different groups of modules from New Jersey to Dushanbe.

Once DS certification was resolved, KI moved forward with
construction of modules and panels in its warehouse in New Jersey. When
modules had to be manufactured securely, they were constructed by cleared
American workers under guard in a secure area of KI’s manufacturing plant.
There is no disagreement over the fact that the fourth-floor floor panels were
not constructed securely.

34
 The next time that the subject of the panels was discussed was on July
12, 2004, when Wayne Algire, the Site Security Manager, became concerned
that the fourth floor panels were not included in the secure shipments. He e-
mailed Charles “Chick” Little, Mr. Algire’s Desk Officer and point of contact
within the Washington, DC office of OBO, and Charles Kuehne, Senior Desk
Officer for Central Asia and team leader for security procedures at DOS, JX
541 at 12, asking, “As there are no more secure shipments, that I am aware of,
how is this stuff getting here[?] . . . Is the fourth floor south wing not CAA,
just contiguous with the CAA?” JX 541 at 13. Mr. Little responded that,
although he had to reference the drawings18 before he gave a final answer, he
could advise that, “IF it is for the CAA, it needs to be securely purchased and
shipped, unless it can be randomly selected at 25% or less out of the whole of
the exact same item. If it is for non-CAA, no restrictions.” JX 541 at 12.

Then, Ms. Wilkins added the following to the e-mail chain:

The Fourth Floor immediately above the CAA on the south wing
of the building has full height parapet walls. The enclosed area
is partially open to the sky. Those walls were not shipped
secure. They cannot be randomly selected from other stock as
they are custom. They have already shipped (non-secure) and
will be here within a few days. Please advise whether we should
allow them to be installed.

JX 541 at 11. Mr. Algire agreed with Ms. Wilkins’ assessment and wrote to
Mr. Little and Ms. Wilkins, “The steel as I read the drawings is for the CAA
on the fourth floor above the CAA on the second and third floor of the CAA
south wing.” JX 541 at 8.

On July 20, 2004, Mr. Little provided his answer as follows:

I have looked at the drawings for this. I have also talked
with Sharmeena [Salam-Haughton]. . . .

....

This fourth floor for the South side is a “penthouse” a

18
These design drawings of the CAA were also classified and not produced for
our inspection at trial.

35
 “mechanical penthouse”. Yes, it is covered. Why? We do this
sometimes. All the equipment that goes into this area is
procured and shipped non-secure.

This area is completely a non-CAA area. For
construction, this means locals with CSTs [Construction
Surveillance Technicians], since it is General Work area. . . .
Since the floor is contiguous, the the [sic] installation of the
floor slab itself should be by cleared Americans.

I hope this resolves the issues about the fourth floor.
This is rather normal for all NECs [New Embassy Compounds]
as far as how the area is constructed. In actuality, for NECs at
the same level as yours, general construction, which includes the
floor and ceiling slabs, can be done by locals under CST
surveillance, so in essence requiring Cleared Americans for
doing the slab is a step above what occurs on normal stick build
projects.

JX 541 at 2.

The fourth-floor floor steel panels arrived in Dushanbe sometime
between July 22 and August 20, 2004, after being constructed and shipped
non-securely. Once the panels arrived, KI began installing them. KI was able
to begin installing the panels in August of 2004 because, at this time, all of the
modules for the South side of the NOB, the side that housed the CAA, were
in place. JX 71 at 1 (OBO Project Director’s June 2004 Report); JX 48 at 129
(Expert Demonstrative showing the sequence in which each module and panel
was set in place); Tr. 934 (Allen). Mr. Allen testified that “[t]he area had –
around the building had been completely backfilled because we had set all the
modules. We wouldn’t have been able to set all the modules if we weren’t
completely backfilled.” Tr. 935. We find Mr. Allen to be a credible witness.
KI had installed 6 fourth-floor floor panels when it was ordered to stop work.

On August 20, the CO wrote to Mr. Rand to notify him that KI was
responsible for rectifying what he viewed as a security breach in accordance
with direction from OBO. The issue was framed in the following manner:
“[T]he third floor modules were fabricated and shipped without the required
steel plating. Instead, the third floor ceiling steel plating was fabricated as part
of the fourth floor modules. The fourth floor (penthouse) modules were
fabricated and shipped, unsecured, and cannot be used as part of the third

36
floor.” JX 611 at 1. In response, KI asserted that it had followed the OBO
approved plans for secure manufacturing and shipping. Ms. Salam-Haughton
followed up on August 26, 2004, with potential mitigation strategies suggested
by OBO.

Mitigation involved inspection of the panels; OBO sent a security team
to conduct the inspection on site from September 17 - 28, 2004. There were
36 panels in total, some of which were stored in the secure storage area and six
of which were already installed in the main embassy building. In order to
determine whether the panels19 had been compromised, the OBO security
team, with the help of KI cleared personnel, moved the panels to the inspection
area,20 cut holes as large as 6 inches by 6 inches in the sides, top, and bottom
of each panel so that the team could explore the interior of the panel, and then
verified that there were no listening devices or other abnormalities. This
inspection process “required the contractor to provide additional manpower for
cutting holes, a heavy lift crane with operator, [and] workers to maneuver the
panels into place.” JX 677 at 12. The OBO security team found no major
issues or anomalies, although the team noted that there was “water in the
majority of roof panels.” JX 677 at 1. KI was not permitted to install the
panels until the entire inspection was complete. Once the inspection was
complete, KI was left with the work of repairing the panels. In addition, OBO
later insisted on the installation of additional acoustic material to protect
against the possibility that the inspection had missed a listening device.

Lorri Lowther, who was returned to her former position as CO at the
end of October 2004, gave KI written notice on November 23, 2004, to
“immediately proceed with Phase II mitigation above the three specific areas
on the third floor.” JX 807 at 120. The parties, however, continued to seek a
strategy for full mitigation. On December 6, 2004, Ms. Lowther wrote the
following to Mr. Rand:

OBO agreed to four different [mitigation] options that would be
acceptable for Kullman to execute with the understanding that

19
The panels were “3 meters x 9 meters and constructed of 6” steel tube
framing, steel I-beam cross members dividing each panel into 9 sections, with
6mm steel on one side and 8mm steel on the other to enclose the panels.” JX
677 at 11.
20
KI did not remove the six panels that had already been installed. They were
inspected in place.

37
 Kullman would propose their preferred option within the
following days. In discussions on December 3, 2004 with
Sharmeena Salam-Haughton and Eric Rumpf, we understand
that Kullman intends to pursue the systematic solution for Part
II consisting of ceiling tile, the enhanced gypboard [quiet rock]
and an expandable material in the voids.

This is to again advise that OBO accepts Kullman’s choice and
Kullman is authorized to proceed immediately with execution.

....

This guidance is provided to Kullman Industries to mitigate
Kullman’s improper shipment of third floor ceiling panels. The
Government will not consider an equitable adjustment for either
time or costs . . . .

Mitigation, by definition, is not a change to the contract.

JX 807 at 122-23.

Shortly after the inspections concluded, KI resumed installing the
fourth-floor floor panels. KI finished installation of the fourth-floor floor
panels on October 20, 2004. By the end of October, all of the modules and 12
wall panels had been set. In November, KI installed “all remaining wall and
floor panels at [the] NOB.” JX 76 at 1. “[S]etting and welding steel columns
and roof panels at NOB mechanical levels” continued into December. JX 76
at 1. By the end of December, the roof was in place, although the roof
membrane was not finished, meaning that the roof was not yet fully watertight.

Joseph Allen, KI’s Site Superintendent since May 2004, testified that
Dushanbe experienced an unprecedented rainy reason, which began on
November 17, 2004, and lasted into February of 2005. Because of the delay
associated with the CAA security concerns, KI was not able to complete the
roof of the NOB by the time the rains began.21 As a result water infiltrated the

21
Mr. Allen testified that KI was not able to get the roof installed and
watertight before the rains came because of the delay with the fourth-floor
floor panels. Once the floor panels were welded into place, KI had to install
“wall panels that had to sit on top of those panels that made up the mechanical
(continued...)

38
rest of the building, which had been paneled with gypsum board. Mr. Allen
recalled that the building sustained water damage and subsequently mold
damage. He testified that KI tried “to keep up with it and replace the areas we
knew were getting – that got damaged. But it got too extensive. It –
temperature was right, weather condition was right and, you know, mold just
grew.” Tr. 837.22 The mold issue was not unique to the NOB but also plagued
the other buildings being constructed at the embassy compound. See Tr. 923-
27 (Allen) (stating that there was a minor mold problem in the gate houses and
that there was a mold in the Marine Security Guard Quarters).

The mold problem in the NOB grew so severe that the OBO Project
Director ordered KI to stop work until there was an approved mold removal
strategy. All of KI resources were diverted to the mold issue, and an industrial
hygienist was brought in to assess the damage and propose a remediation
strategy. Mr. Allen recalled the process for removing the mold beginning with
closing a room and then “we’d seal off the room. So we’d seal it off. And the
reason we did that is the industrial hygienist, when – when you pull the
sheetrock off you can spread more mold spores.” Tr. 929. The crew bagged
up the sheetrock that had been ripped off the walls and disposed of it off-site.
In order to keep track of the man hours spent on mold remediation, Mr. Allen
created a spreadsheet and directed Dennis Vance, KI’s on-site Safety Manager

21
(...continued)
space on the fourth floor.” Tr. 840. Then, KI “had to bring in all the
mechanical equipment that went in that section into the building, and set that
before we put the roof on the building.” Tr. 840 (Allen). Mr. Allen recalled
that it took two months to get the waterproofing “roof on even with the rain,
which delayed us quite a bit.” Tr. 840. When asked if KI anticipated the
possibility of rain or attempted to fashion a temporary roof during the rainy
season, Mr. Allen explained that the modules had been shipped with temporary
roofs that had to be removed once the floor panels were installed and that KI
tried to build a temporary roof on site but, “[i]t was like trying to tent a football
field.” Tr. 841-42.
22
Mr. Allen contrasted the mold issue spawned by the winter rains to the
minor amounts of mold that had been encountered in late spring 2004, which
developed during shipping. There had been a few modules that developed a
small amount of mold because they had gotten wet during ocean transit. Mr.
Allen’s team eliminated the mold in these modules by cutting out the sheet
rock, removing the wet insulation, cleaning up the area, and replacing the
moldy materials with clean new materials.

39
who worked with the industrial hygienist, to input the hours for labor. Mold
remediation continued throughout the spring of 2005.

On February 9, 2005, KI submitted a formal request for an equitable
adjustment23 to cover the delay and cost of the security mitigation measures to
Walter Cate and Robert Powell, the Division Directors in DOS’ Office of
Acquisition Management. JX 807. In its request, KI asserted that it
“emphatically believes that it operated within the OBO approved construction
security and transit security plans for the factory fabrication and shipment of
the general construction items in question.” JX 807 at 4. KI wrote the
following:

Kullman communicated its intentions regarding the secure and
non-secure shipment of these items with the Government
through multiple document revisions, product models, and in
meetings during the construction and transit process. At no time
were the steel panels identified by OBO as requiring secure
shipment. Additionally, each of the secure shipping plans is
clear as to the tentative shipping schedule, route description, and
a list of the items being securely shipped.

Until August 20, 2004, and despite our thorough documentation
of the fabrication and shipment of the modules and panelized
sections for the NOB, at no time was Kullman ever notified that
the factory fabrication or shipment plans were incorrectly
implemented.

JX 807 at 4. Ms. Lowther eventually denied the REA on June 15, 2005, two
days before KI would later be terminated for default. In her letter of decision,
Ms. Lowther wrote, “I . . . disagree with your letter’s efforts to imply that OBO
is somehow responsible for or approved the improper shipping of the third
floor ceiling panels.” JX 1129 at 1.

On August 18, 2010, plaintiff filed a certified claim for the additional
security work and mitigation, seeking $1,083,734.91, which includes mold
mitigation costs for only one building: the NOB. At trial, KI reduced the
amount of the claim to $934,611.

23
KI sent an initial REA for the security mitigation to the CO at the time,
Brian Mulcahy, on September 9, 2004, which was subsequently denied by Ms.
Lowther during her second stint as CO.

40
 D. Finances

1. The Audit of KI’s Geotechnical Claim

KI filed a claim on July 1, 2004, seeking $3,728,358.62 for costs
associated with the geotechnical work. In its claim, KI asserted various
theories for why it was entitled to additional compensation for the soil
remediation efforts. First, KI reasoned that “[a]n equitable adjustment is
dictated by the fact that the parties understood and agreed that the geotechnical
program was not part of the negotiated price on May 9, 2003. . . . It is now
unconscionable for the OBO to disingenuously assert that the negotiated price
included the geotechnical programs.” JX 25 at 9. If the government did not
understand KI’s position during negotiations, then KI argues that “there was
no meeting of the minds.” JX 25 at 13. Finally, KI claimed that “the
government is obtaining the soil stabilization program without paying for it.”
JX 25 at 14. According to KI, “the government was fully aware that Kullman
had not submitted and negotiated a price for the geotechnical program. In
similar situations, the courts have held that the contract may be reformed in
order to reflect the true intention of the parties . . . .” JX 25 at 14.

Faced with KI’s geotechnical claim, Ms. Lowther and John C. Sawyer,
an attorney in the DOS Office of General Counsel, turned to the Office of
Inspector General (“OIG”). On December 1, 2004, Ms. Lowther and Mr.
Sawyer met with the OIG employees, Michelle “Mickie” Selby and August
Van Dessel, and requested that OIG audit Kullman’s geotechnical claim
because the Department of State believed that it “had paid Kullman for the
items that Kullman is basing its claim on.” JX 119 at 226.

Before the audit began, Robert Powell, the Division Director in the
Office of Acquisition Management, issued his final decision regarding KI’s
July 2004 geotechnical claim on December 9, 2004.24 Mr. Powell wrote the
following with help from Lorri Lowther:

Your . . . statements make it clear that according to your claim
KI has not been paid for the geotechnical work which KI has
performed. These statements are very troubling. My staff has
made a thorough review of KI’s invoices to date and the
payments which the Government has made in response to those
invoices. This review indicates that KI has been paid

24
KI appealed this decision on January 19, 2005. JX 119 at 990.

41
 approximately $2,629,547.00 specifically for all geotechnical
work. . . . The invoices reflect that KI has billed for 100% of
the geotechnical work and has been paid for the billed amount
less contract retainage. This evidence indicates the [sic] KI
either believed at some point prior to raising this claim that the
contract provided for the cost for geotechnical work and KI was
properly billing for the work performed and its associated costs,
or KI improperly charged the government for work which was
not in the contract. In either case, the evidence to date is that the
government has already paid for all geotechnical work
performed . . . . My perception is that your claim for
$3,728,358.62 is for reimbursement for work already performed
and paid for. . . . Wherefore, in light of all the above facts and
evidence I deny your claim in its entirety.

JX 26 at 9-10. Mr. Powell also pointed out that KI was required to perform its
own geotechnical analysis and had even invoiced the government for doing so
before the LBG traveled to the site in January 2003 and throughout the May
2003 negotiations: “the Department did not once indicate that soil preparation
was to be taken out of the contract nor did KI claim that soil preparation was
not part of the their GMP Phase II proposal. . . . The only allowance mentioned
in KI’s September 27, 2002 proposal was for transportation.” JX 26 at 4-5.

Mr. Powell’s puzzlement about the apparent conflict between the
premise behind the REA–KI had not been paid for the additional geotechnical
work–with the premise behind previous progress payments–that KI had
performed and been paid for over $2 million in geotechnical work–is
understandable. The apparent contradiction, of course, is that the contractor
should not have been seeking payment for work as to which it had already
been paid. The contradiction is not real, however, given the explanation for
it. As is more fully explained below in connection with how the SOV was
used, what Mr. Powell apparently did not know is that KI, with the
concurrence of OBO’s Mr. Ross and Ms. Wilkins, put geotechnical work into
the SOV and funded it by moving money from transportation to the geotech
line item. There seems to have been no objection by the contracting officers
to paying invoices on this basis.

KI’s decision to budget very little for geotechnical work, of course, was
based on the incorrect assumption that the government had agreed in advance
to approve a differing site condition claim for geotechnical work, up to $2
million. That assumption was misguided, and as we conclude below, this

42
misunderstanding was entirely of KI’s making. Unfortunately, moreover, not
only did it cause KI continual financial stress throughout the contract, but it led
to a quixotic crusade by DOS legal officers to pursue a fraud investigation of
KI, which unnecessarily poisoned the working relationship between the
parties.

“OIG conducted its review in Lebanon, New Jersey, from February 7
to February 17, 2005, inclusive.” JX 119 at 55. KI provided many documents
for OIG to review in the course of the audit, but KI did not provide any
information on its initial pricing proposal or supporting data. The auditors
were permitted to “identify information bearing on entitlement” to the claim.
JX 119 at 226. As part of the audit, the OIG looked for indicators associated
with fraudulent claims. The auditors concluded that “[t]here was no one
indicator present. The contractor was able to support the transactions OIG
selected for review and we found no exceptions that would indicate fraud.”
JX 119 at 962.

Mr. Sawyer and Ms. Lowther were privy to updates on the audit and
communicated about it via e-mail. Mr. Sawyer wrote the following to Ms.
Lowther:

In reference to the audit. It appears that Kullman did bill the
Government for the for the [sic] Geo tech [sic] and have
credited it in the books. . . . Kullman put in an REA for a
differing site condition on the grounds that the Geotect [sic] was
not in the contract . . . . Subsequently Kullman billed for the
work as if it were in the contract and we paid the invoices. I
believe this counts as an action against interest on the part of
Kullman and acceptance of our payment constitutes payment of
the debt “satisfaction and accord.” For Kullman, Inc. to have
asked for the funds now in a[] claim before the GSBCA I think
constitutes a false claim.

JX 811 at 2. Ms. Lowther responded,

WOW! You never want to believe that anyone could do
something like this, but if it had to be one of our contractors
then Kullman is the one who I would believe it of. You’re right
Kullman did first come in with the REA claiming that Geotech
was not part of the contract . . . . Once Kullman received the
denial of the REA, they started billing the government . . . .

43
JX 811 at 1. We find this professed ignorance of what KI was doing to be
inexcusable. If Ms. Lowther was genuinely surprised that KI had been given
permission to move money from transportation to geotech, then she had not
been properly briefed about events prior to her tenure as contracting officer.

A draft of the OIG audit report was issued in March of 2005. On
March 11, 2005, August Van Dessel e-mailed a draft of the Kullman Claim
Report to Fay Ropella and Alma Wolfe. JX 119 at 44. The e-mail receipt
shows that both Ms. Ropella and Ms. Wolfe received and read the draft on this
date. The March 11, 2005 draft did not contain any financial figures or
conclusions, however. Mr. Van Dessel sent another draft to Ms. Wolfe on
March 21, 2005. This draft included the following assessment: “Our audit
determined that Kullman had, through February 16, 2005, incurred $3,523,728
of costs related to the claim and $11,040,1[2]3 [sic] related to transportation
costs.” JX 119 at 51. On April 7, 2005, Mr. Van Dessel e-mailed Mr. Lefkus
a draft of the Audit Report for review and comment.

The draft of the audit report contained in JX 119 includes changes
proposed by KI in an e-mail dated April 11, 2005. This draft contained the
following language, which was ultimately omitted from the final report: “We
also determined that the claimed amounts were reasonable, allocable and
otherwise allowable in accordance with the terms and conditions of the
contract and with the cost principles set forth in Part 31 of the Federal
Acquisition Regulation (FAR).” JX 119 at 59. Mr. Van Dessel also inserted
this sentence that was provided by KI, “The Modification of the schedule of
values was a cooperative and open effort between OBO and Kullman. The
‘shifting of funds’ in the schedule never increased the fixed lump sum contract
and the Contractor only did this after communication and guidance.” JX 119
at 62. Mr. Van Dessel testified that when Mr. Sawyer was informed of the
contents of the draft audit report, he was visibly upset and annoyed. He was
also annoyed that KI had been given an advanced draft of the report and been
asked to comment on it.

On June 15, 2005, OIG held a meeting of department officials regarding
the review of the claim submitted by KI. Mark Duda, Karen Holcomb, Alma
Wolfe, Michelle Selby, Lorri Lowther, John Sawyer, and Dennis Gallagher
attended this meeting. “Mr. Sawyer prefaced the discussions by thanking OIG
for the draft report.” JX 119 at 144. “Ms. Lowther informed all that OBO was
taking over the job with the expectation of building what could be done in 60
days.” JX 119 at 144. “Ms. Lowther stated that she was receiving calls from

44
Kullman subcontractors regarding them not being paid by Kullman. Ms.
Lowther was concerned due to the fact that Kullman is certifying on their
vouchers that the subcontractors have been paid for their work.” JX 119 at
145. “Mr. Sawyer is hoping DOJ will try the False Claim.” JX 119 at 145.
“Mr. Sawyer stated that the OIG draft report released to Kullman for their
comments was being paraded through the halls of Congress and that it was
likely that OIG would be called into court to testify on behalf of Kullman.” JX
119 at 145.

The Office of Inspector General’s “Report of Audit” is dated July 2005.
Its purpose:

to determine whether amounts claimed were: (1) substantiated
as having been incurred; and (2) were reasonable, allocable, and
otherwise allowable in accordance with the terms and conditions
of the contract and with the cost principles set forth in Part 31 of
the Federal Acquisitions Regulation (FAR). OIG extended the
scope of its review to include transportation costs incurred by
Kullman through February 9, 2005, because Kullman had
adjusted this item from $12 million to $8.8 million to provide
funding to bill for geotechnical costs.

JX 118 at 3. OIG judgmentally selected and tested 82.8%, or $2,552,278, of
the geotechnical costs claimed and 82.4%, or $9,094,366, of transportation
costs. For both the geotechnical and transportation costs, OIG found adequate
support for costs tested and noted no exceptions. In sum, the audit confirmed
KI’s costs with respect to the geotechnical claim. There was nothing deceptive
about the claim, moreover, because KI knew that the agency was taking the
position that the additional geotechnical work was not part of the contract and
could only become part of the contract through a REA. If the claim had been
successful, monies would have been added to the contract and funds
presumably would have been restored to the transportation budget.

2. Kullman Industries’ Financial Practices

a. The Procedure for Obtaining a Progress Payment

Despite its financial problems, KI continued to work on the Dushanbe
project and to seek payment from the government. In order to receive a
periodic payment under the contract for overhead, profit, and “the value of
labor and materials completed and in place,” JX 1 at 61, KI would submit an

45
invoice, including a certification, to DOS based on the percent of the work
completed compared to the SOV.

i. The Schedule of Values

Much like a project budget, the SOV was a list comprised of line items
that each corresponded to a particular task or activity required to complete the
contract. Jt. Stip. ¶ 40; Tr. 1378 (Rand) (“[T]here are no subcontractors or
suppliers listed on our invoices to the government, only activities.”). The
contract price was allocated among these various line items, such that the
estimated amounts stated for all the line items added up to the contract price.
Together these various line items, and dollar estimates allocated to them,
corresponded to the SOV. As Mr. Farley, the on-site DOS Project Director,
testified, “[a] schedule of values is basically a breakdown of the contract price
or contract value into its component parts to assist in the payment process.”25
Tr. 209. Specifically, the SOV “breaks the large contract sum of $60 plus
million down into digestible pieces that you can actually evaluate and assign
percentages of completion against each of the line items in the schedule of
values and arrive at a total for the month.” Tr. 209 (Farley); see JX 57 at 15.

Arriving at the monthly percent completion for each line item on the
SOV was a collaborative process between KI and DOS.26 Mr. Kosinski, KI’s

25
This understanding of the SOV is consistent with the definition in the
contract, which provides:

The Schedule of Values is a tabulation of cost-loaded work
elements or activities as defined in the Contractor’s project
execution schedule to include all design, construction, and all
other cost elements of the project. The Schedule of Values shall
segregate major project elements to reflect design and
construction costs for each major building and area of the
project.

JX 57 at 15.
26
Mr. Farley gave the following explanation of how the parties would arrive
at the percent of work completed:

Essentially a contractor would sit down and go through the
(continued...)

46
on-site Project Manager, who was part of that collaborative process, explained
that because the SOV was an estimate made at the beginning of the job, the
value of each line item did not always match what eventually was spent on
accomplishing that task. He testified that “there weren’t direct one-for-one
correlations between everything. Once we actually got to the construction
phase, you know, the – the design was developed further along and there were
aspects of the construction work that weren’t directly identified or addressed
on the schedule of values.” Tr. 750-51 (Kosinski). One of the illustrations of
this lack of precision has been discussed previously, namely, that “[i]n the fall
of 2003, DOS and Kullman agreed that the SOV would be modified to add line
items specific to the geotech work by reallocating $3 million from the
transportation line item to the new geotech line items, so that the total contract
price did not change.” Jt. Stip. ¶ 40.

This collaborative effort to move transportation monies into the
geotechnical item had the beneficial effect, at least for KI, of giving it money
up front to cover its actual geotechnical expenses. The unfortunate collateral
effect of doing so, however, was to camouflage a fundamental disagreement,
namely, whether the geotechnical work was covered by the fixed price. By
moving $3 million from transportation to geotechnical, KI financed its earlier
activities, but it merely postponed the pain of running into the cap on a fixed

26
(...continued)
schedule of values and would mark up what he felt he was
entitled to be paid for that month, [and] submit it to our office.

Our engineers would review the various line items as proposed
that concern their particular discipline, check off on them or not.
And then I would review it, would pass it back to the contractor.
The way that we would do this is through an informal discussion
if we had disagreements with percentages or amounts that were
complete or not complete.

They would submit it to us. We would review it. We would
then discuss and resolve any differences that we may have. It
would go back to the contractor, who would then submit a clean
copy. We would review it to make sure it agreed with the
agreements that we had made. I would sign it, and that would
be the payment.

Tr. 210-11.

47
price contract.

ii. The Certifications

When it submitted invoices, in addition to attaching the relevant portion
of the SOV, KI was required27 to make certain certified representations. The
precise wording of that certification varied over the life of the contract, but the
certification relevant to the government’s fraud claim was that it “has made
full payment from the proceeds of prior payments,” and that it “will make
timely payment from the proceeds of the progress or final payment for which
request is being made, to [the] subcontractors and suppliers in accordance with
[its] contractual arrangements with them.” JX 1 a t 61.28

27
The contract incorporates by reference FAR 52.232-5(c) (1997) and FAR
52.232-27 (Prompt payment for subs). The former states that,

Along with each request for progress payment, the Contractor
shall furnish the following certification, or payment shall not be
made: (However, if the Contractor elects to delete paragraph
(c)(4) from the certification, the certification is still acceptable.)

I here by certify, to the best of my knowledge and belief, that –
(1) The amounts requested are only for performance in
accordance with the specifications, terms, and conditions of the
contract;
(2) Payments to subcontractors and suppliers have been
made from previous payments received under the contract, and
timely payments will be made from the proceeds of the payment
covered by this certification, in accordance with subcontract
agreements and the requirements of chapter 39 of Title 31,
United States Code;
(3) This request for progress payments does not include
any amounts which the prime contractor intends to withhold or
retain from a subcontractor or supplier in accordance with the
terms and conditions of the subcontract; and
(4) This certification is not to be construed as final
acceptance of a subcontractor’s performance.

28
The form and content of the progress payment application was directed by
(continued...)

48
 KI’s initial invoices pertaining to the Dushanbe project did not include
any certification. Then, on November 13, 2003, Eduardo Gaarder, the Chief
of the European and Eurasian Branch of the Construction and Commissioning
Division of OBO, contacted Mr. Rand about KI’s pending application and
certification for payment. Mr. Gaarder sent Mr. Rand two example pay
application forms, noting in particular the importance of the certification. KI
began using the following certification from one of the examples provided:

The undersigned Contractor certifies that to the best of the
Contractor’s knowledge, information and belief of Work
covered by this Application for Payment has been completed in
accordance with the Contract Documents, that all amounts have
been paid by the Contractor for Work for which previous
Certificated for Payment were issued and payments received
from the Owner, and that current payment shown herein is now
due.

JX 288 at 2.

At the end of March 2004, Catherine Wilkins, the DOS Project
Director, Sharmeena Salam-Haughton, the OBO Project Executive, and Mr.
Gaarder indicated to Mr. Rand their view that the certification was not explicit
enough regarding payments made to subcontractors and suppliers. Mr.
Gaarder e-mailed Mr. Rand with an acceptable certification, which Mr. Rand
began using on KI’s subsequent pay applications. Consequently, during the
period of May 2004 through April 2005, KI submitted invoices that bore the
following certification:

I hereby certify that, to the best of my knowledge and belief, that
–
(1) The amounts requested are only for performance in
accordance with the specifications, terms, and conditions of the
contract[;] (2) All payments due to subcontractors and suppliers
from previous payments received under the contract have been

28
(...continued)
the Project Director. JX 1513 at 84 (Division I of the contract documents)
(“The Project Director shall provide to the Contractor an example form,
[which] . . . . shall delineate information required for each application [for
progress payment]. The Contractor shall comply with format as directed . . .
by the Project Director.”).

49
 made, and timely payments will be made from the proceeds of
the payment covered by this certification, in accordance with
subcontract agreements and the requirements of chapter 39 of
Title 31, United States Code; (3) This request for progress
payments does not include any amounts which the prime
contractor intends to withhold or retain from a subcontractor or
supplier in accordance with the terms and conditions of the
subcontract; and (4) This certification is not to be construed as
final acceptance of a subcontractor’s performance.

Jt. Stip. ¶ 42; JX 999 at 1.

Each of the invoices at issue were prepared and certified by Alan Rand.
Mr. Rand, whom the court found to be a straightforward witness, testified that
he understood that “[t]he certification meant that we were paying suppliers in
accordance with the contracts with the government. And also the fact that the
money coming in for the project was being spent on the project.” Tr. 1267.
Mr. Rand further explained that,

I was certifying that the money that the government was paying
Kullman was being used to pay its sub and suppliers, but once
that money ran out there may have been more subs and suppliers
that still needed to be paid. But that the money came in from the
government, that money was used to pay whatever subs and
suppliers could be paid. And, in fact, Kullman paid out more
money than they [sic] had received from the government by the
end of the project in May or June.

Tr. 1453-54. Mr. Rand admitted he was aware that, toward the end of the
project, KI had to juggle payments to subcontractors and suppliers and that
Belcor, Inc. (“Belcor”), the supplier of parts related to the fuel distribution
system, had not been fully paid. Despite this, Mr. Rand believed that he was
truthful in signing the certification because all of the money received from
each progress payment was used to pay subcontractors and suppliers. KI was
retaining no funds for itself, but it was doing triage in terms of paying some,
but not all, of the amounts owed.

b. KI’s Dealings with Belcor, Inc.

KI initially ordered tanks and accessories from Belcor in February of
2004. This first order totaled $170,259, and the term for payment was “NET

50
30,” which according to Mr. Bell, meant that Belcor would invoice KI for the
items once they were delivered and KI agreed to pay Belcor within 30 days of
receiving Belcor’s invoice. Delivery of the tanks and accessories was
scheduled for June 30, 2004.

The items supplied by Belcor, including fuel tanks, day tanks, and their
accessories, correspond with line item “STF 1074 Fab Fuel tanks, piping &
ship to port” on the SOV. JX 640 at 6; see Tr. 236 (Farley). Of the total
contract funds, $435,074 was designated for this line item.

Belcor sent KI the first invoice on May 5, 2004, in the amount of
$43,475 for items delivered in accordance with the first purchase order. KI
paid this invoice in full on July 12, 2004, which was more than 30 days from
the date of the invoice but before KI billed DOS for any work attributable to
line item STF 1074. On June 29, 2004, Belcor sent KI a second invoice for
$27,808.16 for more items requested in the first purchase order. KI paid this
bill in full on August 23, 2004, which was again more than 30 days from the
date of the invoice but before KI billed DOS for any work attributable to line
item STF 1074. Belcor sent two more invoices to KI in the month of August:
August 9, 2004, in the amount of $76,855 and August 25, 2004, in the amount
of $22,120.90. These two invoices, together totaling $98,975.90, remained
unpaid until January 2005.

KI first requested reimbursement for work performed under line item
STF 1074 through invoice No. 13220, which covered work performed on the
project through August 31, 2004. KI requested half of the funds from this line
item and received the requested amount, $217,537, as part of the periodic
payment29 DOS approved on September 22, 2004. The parties stipulated that
KI received the funds from invoice No. 13220 on October 14, 2004. On
December 10, 2004, KI requested payment for the remainder of line item STF
1074 as part of invoice No. 13386, which covered work performed through
November 30, 2004. Invoice No. 13386 contained the certification. DOS
approved the payment30 on December 21, 2004, but KI did not receive the
funds until January 6, 2005. As of January 6, 2005, KI had received the full
amount of contract funds designated in the SOV for prefabricated tanks.

On December 27, 2004, Robert B. Bell, President of Belcor, wrote the

29
DOS did not withhold retainage from this payment.
30
Again, DOS did not elect to withhold retainage from this payment.

51
following in a letter to KI:

Belcor, Inc. has two invoices outstanding on this project totaling
$98,975.90 (copies attached), both of these are now out 120
days with no payment received. The terms on []your PO clearly
state “Net 30”.

Numerous calls to Kullman by Belcor have gone unanswered.
No response, no call backs, no payments. Belcor, Inc. is, as you
know, a small business, and this lack of payment is creating
undo financial hardship on our company.

I would appreciate a response from Kullman Industries, but
more importantly, fulfilment of the contract obligations by make
[sic] payment.

JX 721 at 1. This letter began a series of communications between Mr. Bell
and KI employees.

Andy Linkowsky, an employee in KI’s purchasing department,
responded via e-mail on December 31, 2004, providing a contact telephone
number and informing Mr. Bell that Mr. Rand and Stuart Frieman, the Chief
Financial Officer, had been made aware of Mr. Bell’s letter and that someone
from KI would contact Mr. Bell within a few business days. On January 10,
2005, Mr. Freiman sent an e-mail to Mr. Pearson, Mr. Lefkus, and Mr.
Kullman that contained the following:

As per our discussion on Saturday, we are sending Belcor 10M
towards the 100M we owe them. I spoke to Bob Bell of Belcor
this morning to discuss the same. Given that we are
acknowledging the debt and are sending them 10M, he remained
sane.

JX 734. As promised, KI paid Belcor $10,000 on January 13, 2005. Although
Belcor received this payment, Mr. Bell wrote to Ms. Lowther on January 13
to inform her of the remaining unpaid invoices.

After making the $10,000 payment, KI requested additional supplies
from Belcor. In response, Belcor provided a price estimate and indicated its
willingness to provide the additional items but wrote in a January 18 letter that
fulfilling the order would be a problem because “Kullman Industries is on

52
credit hold with Belcor, Inc. due to a past due balance of $88,000.00 which is
over 5 months past due. Without resolution of this outstanding obligation . .
. Belcor, Inc. cannot authorize further shipments of materials.” JX 745. On
January 20, 2005, Mr. Rand e-mailed Mr. Freiman the following message:

Stu,

KI owes Belcor approximately $88,000. We need to order an
additional $10,000 (approximately) worth of materials. Thus,
our total outstanding debt with Belcor will soon be $98,000.

I spoke to Bob Bell today. He has agreed to continue to sell us
materials, etc. However, he is looking for some type of payment
plan. The $88,000 is a very large open receivable for his firm.

I have agreed to pay him $20,000 within the next seven to ten
days. This will reduce his debt to effectively $78,000. From
that point we need some general understanding of a payment
plan that he can expect.

Please plug the $20,000 commitment into your calculations for
cash flow, etc.

JX 757.31

On January 21, 2005, KI issued a purchase order to Belcor for filler,
pipe, couplings, and an adhesive kit totaling $8,858.75. KI sent Belcor another
payment of $10,000 on January 25, 2005. Two days later, KI ordered from
Belcor another $1,878 worth of supplies, including straps for securing the
tanks.

Daniel Jordan, a KI project manager assigned to the Dushanbe project,
e-mailed Mr. Freiman on February 2, 2005, with a list of creditors “to be paid,”
one of which was Belcor. JX 779. Mr. Jordan wrote, “we owe [Belcor]
$78,975.90, but pay whatever we can spare. Bob Bell has bent over backwards
to get his material on our recent air shipment.” JX 779. Mr. Rand was copied
on this e-mail. KI paid Belcor $10,000 on February 7, 2005. The next day,

31
Mr. Freiman’s response to Mr. Rand was less than enthusiastic as he
questioned “who authorized you to make a commitment for $ without talking
to me.” JX 757.

53
Belcor sent KI invoice No. 34073 in the amount of $9,475.97. On February
23, 2005, Belcor invoiced KI another $465 and KI paid Belcor another
$10,000. KI made a $5,000 payment to Belcor on March 22, 2005.

On April 18, 2005, Mr. Bell sent an e-mail to Mr. Linkowsky at KI
checking on the status of payment. KI paid Belcor another $5,000 the
following day. This was the final payment that KI would make to Belcor. The
balance remaining at that time was $60,869.

c. The Government’s Knowledge Of KI’s Position

Before KI fell behind on its payments to Belcor, it notified the
government of its financial problems, which KI attributed to difficulties with
the Dushanbe project. See JX 303 (KI informed the government of its
precarious financial position and that “subcontractors struggle with large
outstanding balances for work that has already been performed and approved”
as early as December 5, 2003). On April 30, 2004, Mr. Lefkus sent Ms.
Lowther a letter in response to an April 13 meeting attended by Ms. Lowther,
Mr. Lefkus, and Mr. Rand. In the letter, Mr. Lefkus lists “Contractor’s Out-
of-Pocket” unpaid expenses for which the agency was withholding payment,
including the costs for geotechnical work, two unpaid invoices, and another
transportation invoice, which totaled over $9.5 million. JX 475 at 2. Mr.
Lefkus also pointed out that KI faced an additional $6.5 million in “Immediate
Future Obligations.” JX 475 at 2. In light of these unreimbursed expenses,
Mr. Lefkus informed Ms. Lowther that “[t]he project economics simply do not
work for Kullman . . . . [because of] the severity of these economic issues.”
JX 475 at 2. Mr. Lefkus conceded that “[t]he resources to float this amount of
money simply do not exist.” JX 475 at 2. To address this situation, KI sought
“a reasonable remedy where OBO can feel it maintains appropriate security
while the project funding ensures robust performance.” JX 475 at 2.

In a June 2, 2004 e-mail Mr. Lefkus once again stressed the importance
of a meeting between officials from KI and the government to discuss the cash
flow from the Dushanbe project. Mr. Lefkus sent this e-mail to Walter Cate,
the Division Director in the DOS Bureau of Acquisitions and copied Mr. Rand
and Mr. Kullman. Mr. Cate forwarded the original e-mail to Mr. Powell,
directing him to set up a meeting including Ms. Lowther. Ms. Lowther
responded internally to Mr. Powell and Mr. Cate on June 3, 2004,32 that she

32
As of June 3, 2004, KI had received the first invoice from Belcor and was
(continued...)

54
did not believe a meeting would prove useful until KI provided “HARD
DATA,” in writing, to “back-up their wild accusations” especially in light of
the fact that the contract was almost a year behind schedule, that there were
ongoing security issues, and that “[w]e have subcontractors that have not been
paid.” JX 521 at 1.

Additionally, Ms. Lowther testified at trial that subcontractors and
suppliers called her and sent her letters informing her that KI had not paid for
work performed on, or supplies provided for, the Dushanbe project. See JX
1495 (November 18, 2004 letter sent by Ms. Lowther to Mr. Rand informing
him that York International Corporation (“York”) had complained to her about
KI’s failure to pay in full); see also JX 692 (Mr. Rand’s November 22, 2004
response asserting that KI had paid York substantially more money than DOS
had paid KI for line items attributable to work performed by York).33

Despite these facts, Ms. Lowther maintained at trial that KI did not
notify DOS that it was withholding payment from Belcor. According to Ms.
Lowther, notification under the contract was a formal process. Ms. Lowther
pointed to the fact that KI formally notified her, via e-mail, of its intent to
withhold funds from Greenway Enterprises due to a dispute with the
subcontractor. Mr. Rand did,34 in fact, notify Ms. Lowther and Ms. Salam-
Haughton in writing that KI was withholding funds from Greenway
Enterprises because that subcontractor was being terminated for default.

As a practical matter, however, by January 13, 2005, Ms. Lowther
clearly knew that KI had not fully paid Belcor because Mr. Bell wrote to Ms.
Lowther informing her of the situation. Ms. Lowther responded to Mr. Bell

32
(...continued)
within the “NET 30” period for payment. KI did not invoice the government
for line item STF 1074 until August 31, 2004, but paid Belcor’s two initial
invoices by August 23, 2004.
33
Ms. Lowther testified that her role was limited to communicating with KI
about alleged shortfalls in payment to suppliers or subcontractors. She
typically did not investigate such allegations but would turn them over to her
supervisor and the Office of Inspector General.
34
According to Mr. Rand, this notification was required under the certification
because Greenway Enterprises was a major subcontractor on the project and
KI was anticipating major shortfalls due to the issues with Greenway.

55
in a February 3, 2005 letter by summarizing the applicable regulations, noting
that the “government is not privy to the information contained in any prime-
subcontract agreements” and was therefore not involved in the dispute,
pointing to the contract between KI and Belcor as the “key document” for
determining whether KI was within its rights to withhold funds, and assuring
Mr. Bell that she would remind KI of its obligation to pay subcontractors and
suppliers. JX 782. On the same day, Ms. Lowther sent a letter to KI
reminding it that “[o]fficial notification must be provided to the subcontractor
and the Contracting Officer in order to fulfill these requirements [under the
FAR] or else payment must be made.” JX 783 at 1. Ms. Lowther also
forwarded to KI her response to Mr. Bell.

While KI did not respond in writing, it did attempt to address the issue
in person. Ms. Lowther recorded the interaction in an e-mail she sent to Mr.
Sawyer:

Today was the site meeting and both Mr. Rand and I attended
the meeting and we were both very professional. However, in
the meeting they just couldn’t help themselves knowing, I was
in the room and they starting [sic] complaining how they
couldn’t pay their subcontractors because the government owed
them money for Geotech, Mitigation and blah, blah, blah.

JX 811 at 1. After this, KI continued to submit certified invoices through the
spring of 2005,35 and the agency continued to pay them.

After KI’s April 2005 payment of $5,000, Belcor continued pressing KI
to satisfy the outstanding balance of $60,869. Mr. Bell called KI, he e-mailed,
and he threatened to get DOS involved; all to no avail. Although Mr. Bell did
not know it at the time, during May through July of 2005, KI was winding
down construction on the Dushanbe project and preparing to abandon the job.

IV. Termination for Default

A. Final Efforts

Toward the end of the contract, KI sought additional funds from the

35
Invoice No. 13442 was submitted on February 1, 2005, Invoice No. 13493
was submitted on March 2, 2005, Invoice No. 13561 was submitted on April
11, 2005, and Invoice No. 13647 was submitted on May 12, 2005.

56
government and from private sources to ameliorate the project deficit caused
by the accumulation of several issues: the geotechnical work, the security and
mold mitigation issue, and retainage.

1. KI Petitions Ms. Lowther for Return of Retainage

KI formally petitioned Mr. Cate and Mr. Powell to return a portion of
the retained funds on February 18, 2005. On behalf of KI, Mr. Rand wrote,

Over the course of the past twelve months Kullman Industries
has been promised a reduction in the current high amount of
retainage held on the Dushanbe NEC project initially based
upon our ability to successfully transport the modules from our
Lebanon, NJ fabrication site to the Dushanbe NEC site. In fact,
we were promised a pro-rata reduction in the retainage based
upon successful monthly arrivals of the modules in Dushanbe.
Despite successfully delivering the modules to the site, the
retainage was never reduced. Subsequently, we were promised
a reduction in retainage based upon the completion and
submission of a ‘final’ Geotech report. Attached, please see a
copy of the final Geotech report.

I trust that we are now at a point where the retainage on this
project can be reduced to a more appropriate level given the fact
that Kullman Industries is approximately 87% complete with the
project, and to a level that more accurately reflects any
remaining risk that OBO deems required.

JX 826 at 1.

Ms. Lowther denied this request on March 4, stating that it was the
CO’s right under FAR 52.232-5 to retain up to 10% of the contract value when
the contractor had not made adequate or satisfactory progress. JX 863 at 1
(“The promises Kullman references that were made last year to reduce the
retainage were based on the successful transporting of the modules, significant
progress of work and development of an accurate completion schedule. To
date, Kullman has not demonstrated significant progress.”). Ms. Lowther did
not mention liquidated damages as a justification for withholding the
previously retained funds.

57
 2. KI’s Attempt to Obtain Private Funding

In February of 2005, KI began an effort to borrow approximately
$2,000,000 from Tatonka Capital Corporation (“Tatonka”). By May 5, 2005,
KI and Tatonka had worked out the terms of a loan.

Carol Hansen, Tatonka’s Chief Executive Officer, contacted Ms.
Lowther “for confirmation of the Dushanbe numbers.” JX 1007 at 1. After
speaking to Ms. Lowther, Ms. Hansen called Mr. Kullman and informed him
that Tatonka could not go through with the loan. According to Mr. Kullman,
Ms. Hansen told him that “Lorri told her that my money was being held for
retainage, that there was mold litigation going on, I was never going to get
retainage, and, you know, things weren’t in too good shape.” Tr. 1823.
Following this telephone conversation, Mr. Kullman e-mailed Ms. Hansen
with a draft letter memorializing what she had told him about her conversation
with Ms. Lowther and asked her to sign and send the letter to KI if she agreed
with the content. Ms. Hansen agreed with the content and sent the letter on
May 13, 2005, which detailed her conversation with Ms. Lowther and formally
denied KI’s request for funding. Ms. Hansen wrote to Mr. Kullman, “While
Ms. Lowther confirmed the retainage amount you indicated, she stated that
Kullman was involved with mold litigation and that liquidated damages would
be assessed. While you made us aware of the geotech claim, these undisclosed
issues prevent us from moving forward.” JX 1007 at 1.

When asked at trial about her conversation with Ms. Hansen, Ms.
Lowther maintained her position that the government was assessing liquidated
damages but admitted that she knew there was no litigation involving the mold
mitigation.

After failing to secure private funding, KI wrote the following to Ms.
Lowther:

In an effort to keep the project moving despite excessive funds
being retained, Kullman sought financing. However, when a
representative of the financing institution contacted you
regarding the status of the project, you incorrectly stated that
there was mold litigation, and that you were withholding funds
due to that litigation. This misstatement caused the financing
institution to retract its offer of financing to Kullman. In
addition, the financing institution was advised that liquidated
damages were being assessed. We have no knowledge of any

58
 assessment of liquidated damages. Whether it was your
intention or not, you certainly damaged Kullman’s financial
resources, which may affect the completion of the project.

JX 1031 at 2 (KI’s response to the government’s cure notice).

3. KI Meets with DOS Officials in a Final Attempt to
Obtain Funding

After exhausting options for private funding, KI once again approached
the government in an attempt to convince it to release all or part of the money
that it had retained on the contract. Mr. Kullman testified that he contacted
General Williams, congressmen, senators, and even “Arlen Specter to go to
Connie Rice who was the head of the State Department.” Tr. 1522-23.
Eventually, Mr. Kullman got in touch with Mr. Prior, the Construction and
Commissioning Director at OBO within DOS. Mr. Prior set up a meeting that
occurred in May of 2005. Mr. Kullman recalled the following:

So then I speak to Mr. Prior, and he’s, you know, he speaks to
General Williams. And he says, General Williams is upset
about the whole thing and he’s upset how your finance company
was interfered with, and there is a recording of that conversation
. . . . And we had a meeting. And it was in a large conference
room filled with the Cates of the world and all the top people
were there.

And I told them, I can’t finish this job. I am going to go out of
business. I am going to go bankrupt. I can’t pay people. And
they sit there – and now all these people had never heard of the
Geotech Report. You’re telling me that the people in that room
didn’t know there was a Geotech Report? Okay. Anyway I
walked out of that room, and what they said was they were
either going to figure out how they could release some retainage,
how to maybe find out, do something on the geotech, do
something in all these different items to free up some money so
we could finish the job. So that’s the first time I ever saw a
meeting where everyone wanted to get together and finish this
job.

Tr. 1524-25. Despite KI’s persistent efforts to have the government address
one of the pending requests for equitable adjustments or to release some of the

59
retained funds, it was unsuccessful.

B. The Cure Notice

Instead of responding to KI’s latest request for money, Ms. Lowther
sent a formal cure notice to KI on May 21, 2005. JX 1027 at 1 (noting that KI
and the government had met extensively during the previous week about the
“current situation”). In the letter, she reminded KI that the Dushanbe Project
was awarded as a sole-source contract because of the project’s urgent and
compelling nature. She wrote, “[n]othing has changed to lessen the urgency
of the completion of this project. . . . [T]ime is of the essence in the completion
of this project.” JX 1027 at 1. Then, Ms. Lowther listed the following reasons
that KI was failing to make adequate progress:

1. The Government understands that York International is
retaining necessary parts for air conditioning because of
lack of payment.
2. The Government understands that PDI has not returned
to the site. PDI’s work is on the critical path to
completing this project.
3. The Government understands that there is 60,000 lbs of
materials remaining at Baltimore Packing. This material
needs to be shipped to the site immediately.
4. The Government understands that there are 6 containers
in Riga awaiting trans [sic] shipment to Dushanbe.

JX 1027 at 1. Unless KI cured these conditions by June 17, 2005, “the
Government will be forced to consider termination for default under the terms
and conditions of the contract.” JX 1027 at 1. Although the contract
completion date of June 20, 2004, had not been changed as of the date of the
cure notice, Ms. Lowther indicated that the government expected substantial
completion of the Dushanbe Project by September 1, 2005.

KI responded on the following business day May 23, 2005, with a letter
addressing the issues raised in the cure notice. JX 1032. KI asserted that it
complied with the first condition and ordered the parts requested from York
International. Next, KI requested DOS’s assistance to secure PDI’s return to
the job site because PDI was currently occupied with another DOS project. KI
explained that the materials remaining in Baltimore were not delaying the
project even if they arrived after June 17, as scheduled. It indicated, however,
that it was willing to expedite the shipping if the government was willing to

60
pay for the increased air freight shipping costs. Regarding the final condition,
KI pointed out that the containers were delayed in Riga because of political
unrest, which was beyond KI’s control.

After explaining its position on the conditions to be cured, KI reasserted
its position on the release of funds being retained and the financial difficulties
of the project. Finally, KI expressed the following:

Although Kullman wants to complete the Dushanbe project, it
may be forced by the State Department’s actions, including its
material breaches of the contract, to reduce its forces to an
appropriate economic level. This step, if taken, is not take
lightly or without considerable forethought. It is somewhat
incongruous and disconcerting that when the project is nearly
complete, the State Department has acted in an arbitrary and
capricious manner, has breached its duty of cooperation and has
interfered with Kullman’s ability to prosecute the work to
completion, including impairment of its ability to obtain
financing.

JX 1031 at 2.

Ms. Lowther mailed and faxed a response to KI on May 24, 2005,
which noted KI’s failure to affirm that it would cure all conditions by the
stated deadlines. She also noted that KI had reduced its on-site workforce by
50% and that an “increase in manpower remains a condition of Cure.” JX
1035 at 3. Ms. Lowther reiterated that the project remained urgent and
compelling and that the government expected KI to cure and make adequate
progress to remain in compliance with the contract.

C. “Winding Down”

Following its response to the cure notice, KI began to reduce its
participation at the Dushanbe job site to what it considered an economically
feasible level. In fact, KI had been considering whether it should wind down
its participation at the Dushanbe project site for some time prior to the cure
notice.

KI’s internal discussions about whether to reduce the scope of work at
the Dushanbe Project began in March of 2005. See JX 860 (discussing plans
to increase the workforce with 15 additional cleared American workers, noting

61
that the lack of funding made paying current workers difficult, and concluding
that “[w]e may very well have reached the point where we need to pull back
the American staff and slow down the operation until OBO releases additional
funds”); Tr. 577-79 (Kosinski). Ms. Lowther recorded that “[b]eginning on
May 11, 2005, Kullman initiated a draw down in its workforce by cutting
approximately 50 percent of its cleared American workers on site.” JX 1035
at 3 (May 24, 2005 letter to KI regarding KI’s response to the cure notice).

On May 21, 2005, Mr. Kosinski discussed with Mr. Rand and Mr.
Lefkus the cost of travel “to fly everyone out of here if that’s where we end
up.” JX 1030 at 1 (suggesting also that five individuals remain in Dushanbe
“to wrap things up”). By the time that KI had responded to the cure notice,
Mr. Kosinski had prepared a spreadsheet of KI’s minimum monthly operating
costs that could be adjusted depending on “how far we want to scale back.”
JX 1033 at 1. Mr. Kosinski recommended leaving the “Case backhoe, the
Bobcat, . . . the small compactor” and the “Lull” on site so that KI could
“continue with at least some of the excavation and grading work even if we
decide to pull everything else out.” JX 1033 at 1. The plan to send a majority
of the workforce home continued to develop over the next few days. See JX
1038 (including a detailed travel plan), JX 1059 (stating the need to purchase
tickets so that the workforce could travel home between the twenty-second and
twenty-fifth of June).

Part of KI’s internal conversation about whether and to what extent the
company should diminish its forces in Dushanbe concerned an effort to predict
how the government would respond. Some KI decision-makers hoped that
reducing the workforce in Dushanbe would cause the agency to take seriously
KI’s claims regarding its dire financial situation and would lead it to grant one
of KI’s various requests for funding. Mr. Rand was not optimistic about the
outcome, however, and wrote the following to Mr. Lefkus: “As we get closer
to D-day with OBO I feel that everyone should be very clear of ‘the end
game’. I would not put it past OBO to terminate KI for default, and then to
hire a [general contractor] to complete.” JX 1064 at 1 (e-mail dated May 29,
2005). He warned Mr. Lefkus that “[w]e are thinking much to [sic] logically
and from a business sense to understand how the government works.” JX
1064 at 2.

In June, the Dushanbe project was nearing completion as KI worked on
the interior and exterior finishes of the buildings and prepared to lay the curbs
where the roads had been graded. Even as work continued, however, KI
further developed its plan for how to move most of its workforce out of

62
Dushanbe. JX 1086 (June 7, 2005 e-mail with attachment “showing how
much additional funding is required to pay off all our local accounts as of June
15th”); JX 1090 (June 7, 2005 e-mail working out travel details). Mr.
Kosinski testified that while there was a possibility that KI could re-mobilize
the workforce if the government provided additional funding, the only people
who were scheduled to return to Dushanbe were himself, Fred Martinez, and
Joseph Allen.

Despite the fact that KI planned to leave the job site in June, it kept its
intentions concealed from subcontractors and from the government. JX 1090
at 1 (“At some point - BUT NOT YET!!!! - we will need to notify Atlantic
Group to make . . . arrangements for their (5) remaining guys who are also
scheduled to depart via Istanbul on the 22nd. Please take direction from Alan
on the appropriate time to contact the Atlantic Group - NOT YET!!!”); Tr. 596
(Kosinski) (“[I]t seems that we didn’t want to let Atlantic Group know what
we were planning to do at that point. . . . Maybe it was we didn’t want them to
pull their guys out or to get concerned that we were pulling off the project.
Maybe we didn’t want them to tip our hand to the government at that point.”).
One reason was that DOS had approved a $679,423.00 progress payment on
June 2, 2005, which KI was waiting to receive as of June 7, 2005. JX 1087 at
1 (“Mr. Kullman confidentially explained to us that he will be collecting a
fairly large receivable from the State Department. After receiving this
payment, he will begin pulling his people off the State Department job.”).

Between June 1 and June 18, KI maintained only minimal labor on site.
On June 13, 2005, Mr. Kosinski wrote to Christine Byrnes, Alan Rand’s
Administrative Assistant,36 that the local workers would be laid off the next
day. The June 13 travel plan listed departure dates for local workers and KI
employees between June 8 and June 25. KI began sending letters to its
subcontractors on June 14, 2005, asking them to cease work on the Dushanbe
project, remove any on-site workers or materials, and halt any plans to deploy
materials or personnel. KI included in these stop work orders a sentence
expressing that “[w]e are hoping to work out disputes with the US State
Department in order to remobilize the project. However, we do not know what
the outcome of these discussions will be.” JX 1114 at 1. Mr. Kullman
attempted to contact Ms. Lowther by phone and e-mail on June 14, 2005, to
“discuss the current situation on the project.” JX 1118 at 1. Nevertheless, Mr.
Kosinski meanwhile was destroying contract files as part of preparations to
leave the job site. As of June 20, 2005, KI had suspended all contractor and

36
Mr. Rand, Mr. Jordan, and Mr. Allen were copied on this e-mail.

63
subcontractor activities on site.

D. The End

On June 17, 2005, DOS terminated the contract for default. Ms.
Lowther wrote the following:

Based on our telephone conversation the afternoon of June 14,
2005 the Government understands that Kullman Industries is
demobilizing from the Dushanbe NEC project site effective
Monday June 13, 2005. The Government also understands that
Kullman has written to all of its subcontractors on the project
and informed them that they will not be paid and should leave
the project site. This information has been confirmed today by
the OBO representative at the site. The OBO representative at
site telephoned OBO Washington this morning to notify OBO
that your project manager has confirmed that all subcontractors
have been terminated and that all work on the project has
ceased. You are hereby notified that the Department of State
considers such unilateral action on the part of Kullman
Industries to be an intentional and inexcusable breach of
contract.

JX 1133 at 1, JX 1135 at 1.37 Ms. Lowther testified that after “looking at

37
In the CO’s June 17, 2005 Final Decision letter, she asserted that she had
“assessed liquidated damages as a result of Kullman’s failure to complete this
project on time” and that KI would “be liable for any damages to the
Government resulting from the Contractor’s refusal and failure to complete the
work within the specified time” including costs incurred to complete the work.
JX 1133 at 2, JX 1135 at 2. There is no evidence that Ms. Lowther actually
followed up with a formal assessment of liquidated damages or reprocurement
costs. She had previously stated in the May 24, 2005 letter, however, which
was in the series of communications regarding the cure notice, that the
government had notified KI in writing on June 18, 2004 that it was assessing
liquidated damages and that “[t]o date, Kullman has incurred $1,139,060.00
in [liquidated damages]. In addition, the June 18, 2004 letter explained that
any retainage released would be less the amount of accumulated [liquidated
damages].” JX 1035 at 3; Tr. 483 (Lowther). As Ms. Lowther pointed out, the
government was within its rights under the FAR to retain roughly 4% of the
(continued...)

64
everything as a whole and with them basically leaving the job site and not
progressing on the contract, I felt like I had no other recourse than to terminate
them.” Tr. 450. When asked by the court if her decision might have been
different if she had considered KI’s assertion that its inability to pay
subcontractors was caused by the government’s failure to release previously
earned but retained funds, Ms. Lowther answered, “[a]t the time of the
Termination for Default? Without sounding cold, I would have to say [no]
because they were leaving the job site and that was primarily what I was
basing the determination on, was lack of progress with the work.” Tr. 481.
Thus, the CO’s ultimate justification for terminating KI was that it had
abandoned the job.

When work ceased, the Dushanbe Project was, according to the OBO
Project Director’s Monthly Progress Report, 91.29% complete. On June 6,
2005, Irving Fontaine, the on site Project Director recorded that KI had
recently completed the following activities:

[I]nstalled external window trims at NOB; completed floor tiles
at NOB dining; installed spandrel windows at NOB and MSGQ
stair towers; installed area heaters and overhead coiling doors at
warehouse; completed backfill at fuel diesel tanks; completed
wall insulation [ ] at MSGQ; completed two electrical
manholes; installed acoustic inclosure at water chillers;
completed utility shell, installed HVAC unit and duct work at
service CAC.

JX 82 at 1 (May OBO Project Director’s Monthly Progress Report). The
following activities were ongoing:

sealing between exterio[r] stone panels, removing mold damage
GWB and plywood in NOB; vacuum cleaning and wet wiping
throughout NOB building; installing GWB and plywood
throughout NOB north 2nd floor; plastering and painting walls
at NOB south 1st floor; installing HVAC ducts at NOB 4th
floor; installing studs for internal spaces at service CAC sally
port area; installing rebar for delta barrier at service CAC . . . .

37
(...continued)
contract, which in this case amounted to $2,169,521.50. FAR 52.232-5(e)
(2003).

65
JX 82 at 1.

There is other credible evidence, however, that the progress reports
were inaccurate, and that more than 9% of the work remained. Eric Rumpf,
who was OBO’s Branch Chief for the Europe and Eurasian Construction and
Commissioning Division, traveled to Dushanbe to assess the project status at
the end of June 2005, after KI’s termination. Mr. Rumpf testified that the
project was not nearly complete: there was still work left to be done on the
central utility building, which connected the other buildings with utilities,38
there was no landscaping, the roads and sidewalks were not complete, twenty
percent of the protective perimeter wall was not finished, the buildings were
still missing some exterior facade, there was still work left to be done in the
interiors of the buildings owing to the mold mediation measures, there was still
mold and water damage in the Marine Security Guard Quarters that required
a “major overhaul,” PDI’s work within the CAA had not concluded, and there
were a few windows that still needed to be installed. Tr. 81-100.

V. Bankruptcy

On October 17, 2005, KI filed for bankruptcy. Mr. Kullman recalled
that, “even when I did go bankrupt, every job that I was working on, those
clients all got their buildings. . . . The only client that didn’t get a completed
building was the State Department. And why? Because I was terminated.”
Tr. 1528. During the same time frame, DOS was seeking to debar KI.

The Trustee in Bankruptcy filed her complaint here on June 16, 2006.
The government counterclaimed on June 19, 2007.

DISCUSSION

Trying a default termination frequently takes on the character of a
juridical autopsy, an after-the-fact effort to determine what went wrong and
who was responsible. The autopsy we are called on to perform here is
particularly poignant, given that, at the end of the day, a successful, family
owned business no longer exists. We have no doubt that KI undertook the
contract to build the embassy in Dushanbe fully capable of completing it and

38
Although the internal utilities connections between buildings were not yet
finished, the only utility that was available on site at the time of termination
was water. The government had not yet fulfilled its obligation to provide
external sources of electricity and telecommunications.

66
fully intending to do so. We are also satisfied, however, that virtually all the
problems which arose and kept it from completing the work can be traced to
one mistake KI made early on and which continued to do mischief through the
following two years: KI’s misunderstanding of the effect of M002.

Ultimately it was KI’s self deception concerning what it had agreed to
do, and at what price, that launched contract performance onto a doomed
trajectory. As we will see below, KI bound itself to perform all the work,
including the geotechnical aspects, at a fixed price. Its willingness to hazard
the contract was prompted by an unwarranted assumption that it could ask for
more money if the geotechnical aspects of the foundation proved to be
difficult. That mistake was then compounded by its subsequent reliance on
erroneous advice about the difficulty of preparing the foundation, leading it to
spend, unnecessarily as it turned out, far more than it budgeted for
geotechnical work. The combination of those two mistakes, neither of which
can be shifted to the government, put KI over budget and behind schedule
virtually from the beginning and ultimately accounts for the default
termination.

The fact, for example, that what should have been the routine, bilateral
development of a schedule of values to trigger progress payments became
impossible to establish with accuracy. In order for KI to develop cash flow up
front, it became necessary for the parties to collude on a disingenuous
schedule, postponing the inevitable collision of that contrived schedule with
the reality of more remaining work than remaining money. That, in turn,
prompted KI’s inability to keep up with payments to its subcontractors. KI’s
misguided REA also triggered the government’s belief that KI was attempting
to perpetrate a fraud. Our evaluation must begin, therefore, with the contract
negotiations over price and the subsequent disagreement over who was
responsible to pay for the geotechnical work.

I. The Geotechnical Claim

Plaintiff’s geotechnical claim is difficult for the court to classify. On
occasions it appears to be a differing site condition claim for unusual soil
conditions. Occasionally it is presented as a straight contract claim. I.e., that
the parties agreed to also pay KI whatever it took to complete the foundation
work. It has been presented as a species of bad faith breach of contract claim
or an argument that the government is estopped from denying that it owes KI
more than the fixed price of the contract. In whatever form it is argued,
however, there can be only one outcome. The claim fails because a literal

67
reading of the contract plainly supports defendant’s contention that plaintiff
assumed the risk for how much the geotechnical and foundation work would
cost when it agreed to a fixed price. The facts set out above demonstrate that
the contract obligated KI to perform all the work, including the foundation, at
that price.

The parties did not, contrary to plaintiff’s argument, reserve for a later
day a full reckoning on the price for geotechnical work. It may well be the
case that Messrs. Lefkus, Rand and Kullman believed that they had negotiated
such a reservation, but it does not appear in writing. In fact, the written
evidence is that what KI representatives assumed was in effect an allowance
for geotechnical work was merely the agency’s recognition that, only if KI
could establish a differing site condition due to unusual soil condition would
the agency have to face additional cost. Even assuming Mr. Lefkus knew that
Mr. Sutherland had set aside up to $2,000,000 for a possible differing site
condition claim, he was wrong to leap to the conclusion that the agency would
not contest it.

Nor is there any support for KI’s argument that Mr. Sutherland or others
in DOS knew that KI was operating under the false impression that any work
beyond “standard” foundations was not included in the original contract, and
that this reflected a cynicism bordering on bad faith. KI asserts that it signed
M004 and performed the geotechnical work in reliance on the agency’s
purposeful silence and misleading actions indicating that the geotechnical
work would be paid for through a request for equitable adjustment: “DOS
undertook the conduct with the intention of having Kullman believe DOS was
in agreement with Kullman’s view of the Geotech [issue] to ensure the
execution of Mod 4.” Pl’s. Post-Trial Br. 17.

We disagree. Plaintiff has the obligation to prove that agency
representatives affirmatively misled it. See Zacharin v. United States, 213
F.3d 1366, 1371 (Fed. Cir. 2001). Mr. Sutherland can be charged with
knowing that KI did not want to include geotechnical within a fixed price
contract, but he and others made it as plain as they could that the agency would
not agree to those terms. It would only hold out the possibility of entertaining
a differing site condition claim at a later date. Although Mr. Lefkus may be
a good salesman, and Mr. Kullman is unquestionably a first class manufacturer
and businessman, both gentlemen were naive in their negotiations with Mr.
Sutherland and in not taking him at his word.

We recognize that Mr. Sutherland and other DOS contracting

68
employees were eager, indeed desperate, to close the deal on a fixed price
contract before September 30, 2002. And they may have welcomed KI’s
naivete in agreeing to take on the risk that it could perform at a profit. None
of that amounts to bad faith, however, or grounds for concluding that there was
no meeting of the minds. Either there was a differing site condition or there
was not. If there was, KI would be entitled to an equitable adjustment whether
the agency agreed to one or not. If there was not a differing site condition,
then the fact that Mr. Sutherland held out the possibility of KI attempting to
prove one does not mean that KI is entitled to an equitable adjustment without
proving a differing site condition.

It is ironic, and indeed tragic, that the SANIIOSP report prompted
plaintiff to invest millions in what probably was over-engineering with respect
to the foundation work. But KI’s own experts came to the same conclusion
and the result was investment in an elaborate watering/compaction/de-watering
scheme, which appears to have been unnecessary. The fact that the extra work
was undertaken at all precludes the argument that the possibility of soil
subsidence was unknown to KI. The fact that it was probably unnecessary also
means that there was not a differing site condition.

Nor can the government be held responsible for any possible alarmist
language in the SANIIOSP report because the contract put the burden of site
investigation on plaintiff and its expert. The fact that plaintiff had little time
to do a thorough investigation is also unavailing, as M002 was negotiated after
KI had been given the opportunity to conduct its own investigation. If plaintiff
had been concerned that it was being pressed into making a premature
decision, it had the option of simply not agreeing to the government’s terms,
unpalatable as that might have appeared at the time.

The fact that the schedule of values was amended to include more
money for geotechnical work does not constitute a waiver by the government
of its right to objectively assess whether there was a differing site condition.
It is certainly clear that the agency consented to moving money from
transportation to geotechnical work, but that was done to keep the project
moving, not by way of an agreement in advance to a differing site condition
claim.39 The phrase, “no good deed will go unpunished,” comes to mind.

39
We therefore attach no significance to the testimony of Mr. Powell, who
signed the REA denial as CO. He was asked at trial whether he was aware that
the schedule of values had been amended to include geotechnical work or
(continued...)

69
 We will not venture to estimate the number of DOS offices that had a
role in the formation or administration of this contract, much less the number
of individuals involved. So it is ironic that not enough of the many DOS
employees who had a role in this contract appreciated the implications of the
shift of funds from transportation to geotechnical work. Lack of the most
basic communication on this score triggered a wholly unwarranted fraud
investigation by DOS’ contracting office against KI. The REA, of course, was
based on the assertion of extra-contractual work on a differing site condition.
The shift of funds within the budgeted total contract amount, however, was
predicated on the contrary assumption that the work paid for was part of the
contract. Plaintiff can be forgiven for ignoring the obvious inconsistency; it
was desperate to keep up the cash flow, and it did not hold itself out as
knowledgeable about contracting niceties. The same cannot be said of the
agency’s employees. Mr. Sawyer leapt to the conclusion that the inconsistency
could only be explained by fraud, without, apparently, ever contemplating the
obvious implications of the contracting officer’s acquiescence to moving funds
around. That no one with knowledge of the facts had the common sense to
intercept this juggernaut is distressing. We hasten to point out, however, that
this is not the fraudulent conduct that the government still asserts, which is
discussed below.

In sum, plaintiff was contractually bound to perform all the
geotechnical work for the original fixed price. And none of the agency’s
conduct surrounding the geotechnical issue gave rise to a new contract or
grounds for revoking or supplementing the old contract, nor do they constitute
bad faith.

II. Whether the pay certification on invoices 13386, 13442, 13493, 13561,
and 13647 was false.

In its counterclaims, the government asserts that KI fraudulently
submitted invoices for payment which included false information.

39
(...continued)
whether he was aware of the internal communications regarding a $2 million
contingency being reserved for geotechnical work. If he had been informed
of the reserved contingency, Mr. Powell said that “[i]t would have been taken
into consideration.” Tr. 4680. Even if there had been a “contingency” in the
event an REA was advanced, payment for an equitable adjustment would
depend on whether there actually was a differing site condition. There was
not.

70
Specifically, the government alleges that KI falsely certified in invoices 13386,
13442, 13493, 13561, and 13647 that

(2) All payments due to subcontractors and suppliers from
previous payments received under the contract have been made,
and timely payments will be made from the proceeds of the
payment covered by this certification, in accordance with
subcontract agreements and the requirements of chapter 39 of
Title 31, United States Code; [and] (3) this request for progress
payments does not include any amounts which the prime
contractor intends to withhold or retain from a subcontractor or
supplier in accordance with the terms and conditions of the
subcontract.

Jt. Stip. ¶ 42. The certification was false, according to the government because
KI knew that, at least with respect to one supplier, Belcor, KI had been paid
by the government for all that Belcor had supplied, but KI had not in fact paid
Belcor all that it was owed. The government interprets this certification to
mean that KI warranted that it had paid each subcontractor and supplier in full
for all work completed in the past and would timely pay them in full for work
completed during the pay period for which it submitted each invoice.

Plaintiff argues that the certification could reasonably be interpreted as
meaning that KI had paid its subcontractors and suppliers as much as it could
of the amounts due under the subcontract agreements, or, alternatively, that KI
could make the certification so long as it had some understanding with the
suppliers about paying amounts due over time. This is, in fact, the meaning
that Mr. Rand ascribed to the certification when he signed it.

We find the following from the facts set out earlier in this opinion.
First, defendant is correct that KI certified something that was not true. Belcor
provided $180,236.03 worth of supplies40 which were included in line item
STF 1074 for $435,074. The government paid KI $217,537 (half of the value
of the line item) on October 14, 2004, under Invoice No. 13220 and $217,537
(the remaining half) on January 6, 2005, under Invoice No. 13386. There is
no question that KI never fully paid Belcor for those materials despite having
been reimbursed in full for the amounts billed. In certifying in subsequent
invoices that all payments due to subcontractors and suppliers from earlier

40
STF 1074 was earmarked for “Fab Fuel tanks, piping & ship to port” and
Belcor supplied prefabricated fuel tanks and other related accessories.

71
invoice payments have been made, Mr. Rand must have known that statement
to be inaccurate.41

KI responds that defendant’s assertion of fraud ignores the larger
context of the financial issues attributable to the Dushanbe project. The fact
that plaintiff was having financial difficulties does not vitiate the inaccuracy
of the statement, however. DOS and KI did not specifically agree to waive the
terms of the certification, and we reject the notion that Belcor agreed to a
“payment” plan under the terms of which KI was not actually in arrears to
Belcor.

In fairness to Mr. Rand, however, we find that he did not mean to
deceive the government. He says, and we believe him, that he thought it was
perfectly appropriate to do triage with limited funds by paying whatever
suppliers could be paid or whichever ones could be minimally satisfied with
a partial payment. One hundred percent of the proceeds of those invoices went
to placate suppliers, and thus he was willing to sign the certification. We
conclude that this nuanced interpretation does not, however, overcome its clear
inaccuracy. We remain persuaded that he should have known the statement
was inaccurate and should not have signed it.42

The government asserts that these facts warrant two types of fraud
defenses. The first is premised on the Forfeiture of Fraudulent Claims Act,
28 U.S.C. § 2514 (2006) (“FFCA”). Under the FFCA, a claim against the
United States is forfeited if there is fraud in the proof, statement, establishment
or allowance of it. The government argues that Mr. Rand’s certifications are
fraudulent within the meaning of the FFCA and result in the forfeiture of KI’s
affirmative claims.

To prevail under this statute, defendant must prove “‘by clear and
convincing evidence that the contractor knew that its submitted claims were
false, and that [the contractor] intended to defraud the government by
submitting those claims.’” Daewoo Eng’g and Const. Co. v. United States, 557

41
As of June 2005, KI still owed Belcor $60,869.87 even though KI had
received all of the funds for STF 1074 by January 6, 2005.
42
Defendant asserts that the administrative agency’s decision to disbar KI
because “Kullman’s certifications were not accurate,” JX 1249, bars the court
from coming to a different finding here. We need not consider the parties’
arguments on collateral estoppel. We agree with the finding.

72
F.3d 1332, 1341 (Fed. Cir. 2009) (quoting Commercial Contractors, Inc. v.
United States, 154 F.3d 1357, 1362 (Fed. Cir. 1998)). Mere negligence or
ineptitude does not clear the government’s hurdle of establishing clear and
convincing evidence of intent to defraud. Veridyne, Corp. v. United States,
105 Fed. Cl. 769, 801 (2012) (citing Miller v. United States, 550 F.2d 17, 22
(Ct. Cl. 1977)).

The Federal Circuit recently addressed the scope of 28 U.S.C. § 2514
in Kellogg Brown & Root Services, Inc. v. United States, 728 F.3d 1348, 1366
(Fed. Cir. 2013). After examining the statutory context of the provision, the
Court of Appeals concluded that “the forfeiture statute is best understood as
a companion requirement of claims procedure rather than a catch-all anti-fraud
provision.” Id. It wrote, “On its face, the statute is limited to those
circumstances where the Government proves fraud ‘in the proof, statement,
establishment or allowance’ of a claim at the Court of Federal Claims, not in
the execution of a contract.” Id. (quoting 28 U.S.C. § 2514) (rejecting Court
of Federal Claims decisions which had read the statute to include fraud
practiced during contract performance).

Defendant recognizes that this interpretation makes liability under the
FFCA problematic here. KI has taken some pains to explain the circumstances
of the certifications in the court proceedings. No fraud is being perpetrated on
the court. There was certainly no effort to hide the facts or claim entitlement
under a literal reading of the certifications. We conclude that plaintiff’s claims
cannot be forfeited under the FFCA.

The government also seeks a statutory penalty under the False Claims
Act (“FCA”), which provides the following:

[A]ny person who –
(A) knowingly presents, or causes to be presented, a false
or fraudulent claim for payment or approval;
(B) knowingly makes, uses, or causes to be made or used,
a false record or statement material to a false or fraudulent
claim;
....
(G) . . . is liable to the United States Government for a
civil penalty of not less than $5,000 and not more than $10,000
. . . plus 3 times the amount of damages which the Government
sustains because of the act of that person.

73
31 U.S.C. § 3729(a)(1) (2006). Under current regulations, the range of the fine
is increased to $5,500 to $11,000. 28 C.F.R. § 85.3(a)(9) (2014).

To establish KI’s liability under the FCA, the government must prove
by a preponderance of the evidence, Daewoo, 557 F.3d at 1340, that “(1) the
contractor presented or caused to be presented to an agent of the United States
a claim for payment; (2) the claim was false or fraudulent; [and] (3) the
contractor knew the claim was false or fraudulent.”43 Young-Montenay, Inc.
v. United States, 15 F.3d 1040, 1043 (Fed. Cir. 1994). The government has
“the burden to allege and prove that the statements were false under any
reasonable interpretation.” United States v. Adler, 623 F.2d 1287, 1289 (8th
Cir. 1980).

While the FCA does not require proof of specific intent to defraud, it
does require that the person or entity acted with knowledge. 31 U.S.C. §
3729(b). The statute defines “knowing” or “knowingly” to “mean that a
person” “with actual knowledge of the information” either “acts in deliberate
ignorance of the truth or falsity of the information” or “acts in reckless
disregard of the truth or falsity of the information.” Id. The requisite scienter
in a FCA claim is present in “not just those who set out to defraud the
government, but also those who ignore obvious deficiencies in a claim.” Gulf
Group Enters. Co. v. United States, 114 Fed. Cl. 258, 314 (2013). “An
innocent mistake or mere negligence,” however, is not enough to trigger FCA
liability. Id. at 316. It is reckless when a company submits a request for
payment that had not first been reviewed. United States v. Krizek, 111 F.3d
934, 942 (D.C. Cir. 1997).

As we explain above, we find that Mr. Rand should have known that
what he was certifying was false. The fact that he thought it was accurate
under a strained view of the circumstances does not make it any less false in
the sense meant by the statute.

KI contends that there could have been no reliance by the agency on the
certifications because the contracting officer and others were aware of KI’s
financial distress. Relevant individuals within DOS plainly were aware that

43
The government only seeks the statutory penalty and is not therefore
required to show actual injury or damages. See Veridyne, 105 Fed. Cl. at 808
(“To bring an FCA claim, the Government is not tasked to show that it
incurred damages, although a showing of damages as a result of the fraudulent
claim is required if the Government seeks to recover damages.”).

74
KI was in financial distress, and some had reason to know that KI was not
paying all its suppliers. The question is whether that fact has any mitigating
legal effect.

The Federal Circuit has not spoken to the question of when government
knowledge of the circumstances behind an alleged fraud vitiates the fraud. A
number of other courts have spoken to the issue, however.44 The consensus of
those courts appears to be that the government must have full knowledge of
the particular fraud, which can, in some circumstances, show that the claimant
“did not submit its claim in deliberate ignorance or reckless disregard of the
truth.” United States ex rel. Hagood v. Sonoma Cnty. Water Agency, 929 F.2d
1416, 1421 (9th Cir. 1991).

Accepting that rationale and applying it to the present facts does not
help KI. While the relevant government officials were aware that KI was in
financial distress, and Ms. Lowther must have been aware of the possibility in
January of 2005 that KI was not making full payments to some suppliers and
subcontractors, including Belcor, we are persuaded that she did not specifically
know that the certifications submitted later in the Spring of 2005 were not
correct with respect to Belcor. Although Mr. Lowther heard from Mr. Bell in

44
See generally, “The Government Knowledge Defense To The Civil False
Claims Act: A Misnomer By Any Other Name Does Not Sound As Sweet,” 45
Idaho L. Rev. 41 (2008) (The vast majority of cases have determined that
government knowledge is not an absolute defense to an FCA action. . . . The
significance of the government’s knowledge is determined on a case by case
basis.”). “The knowledge possessed by officials of the United States may be
. . . relevant . . . [to] show that the defendant did not submit its claim in
deliberate ignorance or reckless disregard of the truth.” United States, ex rel.
Hagood v. Sonoma County Water Agency, 929 F.2d 1416, 1421 (9th Cir.
1991). The Ninth Circuit’s decision in Hagood has been cited and followed
in the Second, Sixth, Seventh, and Tenth Circuits, as well as by this court and
numerous other district courts. E.g., United States ex rel. Kriendler &
Kriendler v. United Techs. Corp., 985 F.2d 1148, 1156 (2d. Cir. 1993); Varljen
v. Cleveland Gear Co., 250 F.3d 426, 430 (6th Cir. 2001); United States ex rel.
Durcholz v. FKW, Inc., 189 F.3d 542, 544-45 (7th Cir. 1999); Shaw v. AAA
Eng’g & Drafting, Inc., 213 F.3d 519, 543 (10th Cir. 2000); Tyger Constr. Co.
v. United States, 28 Fed. Cl. 35, 59 (1993); United States v. Fiske, 968 F.
Supp. 1347, 1352 (E.D. Ark. 1997); X Corp. v. Doe, 816 F. Supp. 1086, 1094
(E.D. Va. 1993).

75
January 2005 that KI was in arrears, Ms. Lowther did not have first hand
knowledge of the situation. When she sent KI a letter requesting a response
to the accusations being made by Belcor, KI never responded. Without being
informed of KI’s position on the issue, Ms. Lowther did not know whether KI
was within its rights to withhold funds pursuant to the terms of the subcontract
or whether KI was, in fact, unjustifiably behind in its payments to Belcor. She
perhaps could have guessed the certifications were inaccurate, but we believe
that for government knowledge to vitiate fraud, it must approach something
like specific consent or an agreed-upon interpretation of the terms of the
certification such that the parties agree that the certification does not mean
what it otherwise appears to mean.45 Passivity or lack of inquisitiveness would
not vitiate the fraud.

In sum, we find that the five certifications from February through June
were inaccurate insofar as they asserted that Belcor had been fully paid and KI
officials should have known they were inaccurate. They were made with the
intent to obtain payment from the agency and without concern as to whether
the agency understood the real facts. We conclude that KI is responsible for
five false certifications and award the government $27,500 on its counterclaim.

III. Which party bore the responsibility for delays and additional costs
associated with construction of a secure part of the embassy

As explained above, the agency halted work on the NOB due to
concerns that portions of the CAA were being assembled from materials which
had not been built or shipped under secure controls. This decision was an
artifact of the mutually agreed upon changes made to the CAA design due to
KI’s inability to ship a module twelve feet high. The original plan called for

45
See, e.g., United States ex rel. Ubl v. IIF Data Solutions, 650 F.3d 445, 453
(4th Cir. 2011) (holding that the trial court properly admitted evidence of
agency knowledge and approval of the contractor’s billing practices and
stating, “[f]or example, if the government with full knowledge of the relevant
facts directed a contractor to file a claim that was later challenged as false, the
fact that the contractor did what the government told it to do would go a long
way towards establishing that the contractor did not knowingly file a claim
known to be false.”); United States ex rel. Becker v. Westinghouse Savannah
River Co., 305 F.3d 284, 288 (4th Cir. 2002) (holding that the agency’s
direction to the contractor to change budgeting and reporting codes vitiated
any FCA liability because the agency colluded with the contractor in the
falsehood).

76
the unsecure fourth floor utility space to be built of metal panels on top of the
enclosed third floor CAA. The parties agreed to a fix that turned the third
floor modules at that point into five rather than six-sided boxes. The secure
portion of the third floor was built and shipped in a secure manner, but it had
no heavy metal roof. Because the additional two feet of space in the third floor
was generated by welding two feet to the fourth-floor floor panel, the lid to the
“shoebox” was integrated into the unsecure fourth floor design.

Plaintiff asserts that DOS required KI to undertake security mitigation
efforts that were not part of the agreed upon statement of work at its own
expense. It seeks compensation for extra work and material beyond the scope
of the contract. It also contends that the delay caused the NOB to remain open
to rain, which resulted in the need to do substantial mold remediation. KI was
required to replace drywall and insulation in certain areas of the NOB. It
argues that, if DOS had allowed Kullman to install the fourth floor panels
when they first arrived on site, most, if not all, of the mold remediation effort
at the NOB would have been unnecessary. There is no claim for mold
remediation in any building other than the NOB.

The panels were not manufactured or shipped securely. It was only
after the panels arrived in Dushanbe and six had been installed that the CO
notified KI on August 20, 2004, that the panels could not be used because they
had not been shipped securely. There is no question that DOS halted work and
ordered KI to invest substantial time and money in retroactively determining
whether the CAA space, including the fourth-floor floor panels, was safe. The
question the court must answer is whether the contract required secure
construction and shipment of the floor panels of the fourth floor because they
became the roof of the secure space below. If not, then the agency ordered a
constructive change under the contract’s changes clause.

KI prepared and DOS approved a classified list of items that were to be
manufactured and shipped securely. Both parties had a copy of the list. KI’s
copy of the list was kept in the safe and returned to the government when the
contract terminated. Mr. Algire, Site Security Manager in Dushanbe, had a
copy of the list. Thus, there can be no doubt there was a list that indicated
what components were required to be shipped securely. Messrs. Algire and
Lefkus testified that the fourth-floor floor panels were not on the secure
shipping list. This makes sense, because otherwise Mr. Algire would not have
alerted DOS in Washington to the problem. We also draw an inference against
the government for its failure to produce the list at trial.

77
 The fact that the components of the fourth floor were not on the secure
list is also made likely by the way modifications were made to the height of the
CAA modules. It appears that when the parties agreed on a design to separate
the lower part of the CAA box modules from their tops by making the tops part
of the fourth-floor floor panels, the need to maintain the identity of the roof
panels with the third floor secure space was simply ignored. The government
seeks to shift to KI the responsibility for that mistake.

The government gives the following interpretation of events:

Prior to the presentation of Kullman’s solution, the
fourth-floor floor panels did not form a physical barrier to the
NOB’s CAA space, so they were not designated as secure.
However, Kullman’s solution made the fourth-floor floor panels
serve double-duty, both as flooring panels for the fourth-floor
mechanical space (non-secure), and as the uppermost physical
barrier of the CAA space (secure).

At the November 6, 2003 meeting, Kullman did not raise
any issues related to the manufacture or transportation of the
fourth-floor floor panels in light of Kullman’s proposed
“shoebox” solution. During that meeting, however – and even
though neither party expressly discussed it with the other – both
Kullman and the DOS generally understood that material
designations as “secure” or “non-secure” were assigned prior to
the fabrication stage and subsequently governed the treatment of
the designated material at all stages of the project. However,
Kullman did not communicate that, as of November 2003, it had
already completed the (non-secure) fabrication of the fourth-
floor floor panels that it had now proposed to use as the
uppermost physical barrier for the third-floor CAA space.

Def.’s Post-Trial Br. 24 (citations omitted). We find no factual support for the
assertion that KI understood that the prior designation of the CAA box as
secure meant that the designation carried forward to the fourth floor redesign.
This argument assumes that it was KI’s responsibility to unilaterally change
the design, security designations, manufacturing plans, and transportation
plans to adjust for the redesign. It was the agency which had the primary
responsibility for protecting itself and for establishing a security plan that the
contractor could follow. If DOS wanted the fourth-floor floor panels
manufactured and shipped securely, it should have identified the issue when

78
the modifications were being discussed. The factual recitation earlier in this
opinion reflects the confusion within the agency itself concerning how to
characterize the transition zone between the third and fourth floor.

In addition, the agency’s actions in July 2004 bear out the lack of
definite orders to KI in terms of secure construction of the floor of the
mechanical space. On July 12, 2004, Mr. Algire e-mailed Mr. Little, Mr.
Algire’s Desk Officer within OBO, and Charles Kuehne, team leader for
security procedures at DOS: “As there are no more secure shipments, that I
am aware of, how is this stuff getting here[?] . . . Is the fourth floor south wing
not CAA, just contiguous with the CAA?” JX 541 at 13. The jumbled
responses from several quarters to that inquiry illustrates the lack of clarity
within the agency on how to treat the materials in question. It is hardly
surprising that KI assumed that none of the fourth floor mechanical space had
to be treated as part of the secure construction protocol. Accordingly, we find
that DOS issued a constructive change order when it halted construction and
directed KI to undertake measures to ensure the security of the panels which
became the ceiling of the third floor and the floor of the fourth floor.

It follows from this that the delay in closing the building to the elements
must be assigned to the agency. KI was instructed on August 20, 2004, to
cease installing panels pending the inspection that occurred in late September.
It was not released to continue its panel installation work until September 28.
The fourth-floor floor panels were fully installed by October 20.46 We find
that the delay resulted in an inability to timely weatherproof the NOB and
contributed to the growth of mold and hence the need for mold remediation.
While the government presented evidence that mold was a ubiquitous problem
at the site and not unique to the NOB after the delay commenced, the evidence
is overwhelming that the problems at the NOB were much more extensive and
most likely dramatically exacerbated by KI’s inability to continue work on the

46
Defendant contends that there was a delay in completing installation of the
panels when a crane needed to hoist panels along one side could not be placed
promptly because there was an insufficient foundation on which to place it.
Although this is a disputed issue, we find plaintiff’s evidence more credible on
this question. We have the testimony of Mr. Allen, KI’s on site superintendent
that the area around the foundation of the south end of the NOB was fully in
place when KI began installing panels on the fourth floor. The crane had to
be securely placed, in other words, for any work to take place at that end of the
building. We suspect that Mr. Farley’s notes to the contrary probably reflect
the situation at the north end of the NOB.

79
fourth floor just prior to the rainy period. The fact that rains did not start in
earnest until November does not cut against KI’s claim, because merely
completing the installation of fourth floor panels did not seal the building.

Defendant did establish that there were KI-caused problems with
completely sealing the building after the fourth floor was assembled and that
some modules arrived with mold already in place, but these factors would not
vitiate the entire claim. KI’s claim isolates costs associated with remediation
only at the NOB and then reduces that amount by 25% to account for
remediation that may have been otherwise necessary. The question is thus,
whether 25% is a fair estimate of KI’s share of the blame for mold problems.
We find that it is. The bulk of the costs associated with remediation involved
wholesale removal and replacement of gypsum board throughout the building.
The government did not seriously question the legitimacy of the efforts that KI
undertook to remedy the mold damage and we conclude that 75% of actual
expenses is a fair estimate.

Accordingly, KI is entitled to recover all of its costs associated with
after-the-fact security inspections and repairs and 75% of its costs associated
with mold remediation. We reserve calculation of the precise amount to which
KI is entitled.

IV. Whether the termination for default was justified.

The government must prove by a preponderance of the evidence that the
decision to terminate for default was justified.47 McDonnell Douglas Corp. v.
United States, 182 F.3d 1319, 1329 (Fed. Cir. 1999) (citing Lisbon
Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987)). It is
particularly relevant here that the government is not limited to the reasons
stated in the cure notice, but may rely on any rationale justifying the default
termination decision based in facts that existed at the time of termination.
Empire Energy Mgmt. Sys. Inc. v. Roche, 362 F.3d 1343, 1357 (Fed. Cir.
2004); Joseph Morton Co. v. United States, 757 F.2d 1273, 1277 (Fed. Cir.
1985) (“This court sustains a default termination if justified by circumstances
at the time of termination, regardless of whether the Government originally

47
We do not evaluate the CO’s termination for default decision with deference
because “it is well-settled that the Court of Federal Claims reviews the
decision to terminate a contractor for default de novo.” McDonnell Douglas
Corp. v. United States, 323 F.3d 1006, 1018 n.3 (Fed. Cir. 2003) (citing Wilner
v. United States, 24 F.3d 1397, 1401 (Fed. Cir. 1994) (en banc)).

80
removed the contractor for another reason.”). Under the FAR, the government
may terminate a contract for default when, after a 10-day period for the
contractor to address the deficiencies stated in the cure notice, the contractor
has failed to “[p]rosecute the work so as to endanger performance of [the]
contract.” FAR 52.249-9(a) (2014). The CO is justified in concluding that the
contractor failed to prosecute the work if he or she reasonably believed that
“‘there was no reasonable likelihood that the contractor could perform the
entire contract effort within the time remaining for contract performance.’”
McDonnell Douglas Corp. v. United States, 323 F.3d 1006, 1016 (Fed. Cir.
2003) (quoting Lisbon, 828 F.2d at 765).

The completion date for the contract was June 20, 2004. The parties
went well beyond that date, however, and a new substantial completion date
was never formally established. In the May 21, 2005 Cure Notice, the CO
writes, “The Government still anticipates substantial completion by September
1, 2005.” JX 1027 at 2. The source of that substantial completion date is a
mystery, but it need not be solved. Although we find that the government
waived its right to insist upon the June 20, 2004 substantial completion
deadline, the facts concerning KI’s decision to leave the jobsite provide
sufficient grounds for default termination.

In her termination notice of June 17, 2005, Ms. Lowther relied primarily
on the assertion that KI had walked off the job with no intention to return in
time to complete the work. We find that her interpretation of KI’s conduct is
correct. We now have the benefit of even more information than was available
to her at the time, making it clear beyond doubt that KI elected to cut its losses
by abandoning the contract. We specifically reject plaintiff’s alternative
explanation that it was planning to return to the site. There is no question,
moreover, that even though most of the contract had been performed,
substantial work remained. See McDonnell Douglas Corp. v. United States,
567 F.3d 1340, 1350 (Fed. Cir. 2009) (rejecting a per se rule that the
government is never justified in terminating the contract for default in the
absence of a deadline for substantial completion and instead insisting that the
trial court conduct “an ad hoc, factual inquiry that allows careful examination
and weighing of all relevant circumstances” pertaining to the termination),
vacated on other grounds, Gen. Dynamics Corp. v. United States, 131 S. Ct.
1900 (2011).

Termination for default is justified when the contractor abandons the
project while there is still work to be completed. M.C. & D. Capital Corp. v.
United States, 948 F.2d 1251, 1256 (Fed. Cir. 1991) ((holding that the

81
contractor “breached the contract by abandoning the work and leaving the job
site prior to correcting deficiencies. The latter conduct itself justified the
government’s termination of the contract”); PCL Constr. Servs. Inc. v. United
States, 47 Fed. Cl. 745, 808 (2000) (“[A]bandoning work on a contract without
correcting deficiencies . . . justifies termination for default.”); Appeal of Big
3 Contracting Corp., ASBCA No. 20929, 79-1 BCA ¶ 13601, 1978 WL 2273
(Nov. 15, 1978) (citing James E. Kennedy, Trustee v. United States, 164 Ct.
Cl. 507, 514 (1964)) (holding that contractor “absolutely repudiated the
contract” when it “left the job, removed its equipment and stated it would
resume performance only upon a condition contrary to the requirements and
necessities of the contract”).

Accordingly, it is sufficient to sustain the termination for default to find
that KI abandoned the work. That it did so because of its financial distress is
not a defense. Nor would it be a defense if Ms. Lowther failed to consider
KI’s explanations in response to each cure item and did not permit KI
sufficient time to cure or to meet the September 1, 2005 date for substantial
completion. The same is true of KI’s argument that it could not have
completed if it wanted to because the government had failed to provide
permanent power to the site as of the date of termination. We need not
consider these arguments because of the overwhelming evidence that KI
abandoned the project. That fact alone trumps any possible shortcomings in
contract administration. See Appeal of Protective Coatings Co., ENGBCA No.
3205, 72-1 B.C.A. (CCH) ¶ 9431 (Apr. 13, 1972) (fact that government made
work more difficult does not relieve contractor of obligation to continue to
perform).

Although it is unnecessary to the result, we note as well that the false
payment certifications would give us grounds for affirming the termination for
default, even if that were not known to the agency at the time. See Lamb
Eng’g & Const. Co. v. United States, No. 01-225, 2002 WL 32933387 (Fed.
Cl. Aug. 26, 2002); see also Joseph Morton Co. v. United States, 757 F.2d
1273, 1277-79 (Fed. Cir. 1985).

One final issue remains before the termination for default can be
upheld. That concerns plaintiff’s assertion that agency employees acted with
bad faith toward plaintiff. We have rejected that assertion in connection with
the formation of the contract. Although many of KI’s complaints about lack
of cooperation, lack of civility, delay, etc. may be understandable, they do not
reflect active bad faith so much as a poisoned working relationship which can
be traced to KI’s misunderstanding of what it had contractually obligated itself

82
to do. We also credit the likelihood that the way DOS managed this contract
lead to unnecessary friction. But the agency’s sometimes passive-aggressive
management style does not amount to bad faith sufficient to justify
abandonment of the contract.

There was, however, one incident that warrants specific mention. That
concerns Ms. Lowther’s interference in KI’s attempt to borrow money from
Tatonka Capital. In the spring of 2005, after KI had failed to persuade DOS
to release more retainage, it approached Tatonka Capital about borrowing
approximately $2 million, to be secured by monies the government was
retaining. According to Mr. Kullman, Tatonka had agreed in principle to loan
KI the money, but backed out after Carol Hansen, Tatonka’s Chief Executive
Officer, had a conversation with Ms. Lowther. He testified that “Lorri told her
that my money was being held for retainage, that there was mold litigation
going on, I was never going to get retainage, and, you know, things weren’t in
too good shape.” Tr. 1823 (Kullman).

Ms. Lowther’s statements were not accurate. There was no mold
litigation going on and she never formally assessed liquidated damages. We
did not have the opportunity to explore Ms. Hansen’s decision with her at trial.
She was not a witness. Thus we do not know what Tatonka Capital would
have done if Ms. Lowther had limited herself to the literal truth: the work had
been held up for months because of mold problems; the parties disputed who
was responsible for the mold; the contract allowed for liquidated damages;
and, although liquidated damages had not yet been assessed, KI had been
warned that they might be assessed because the contract was nearly a year
beyond the original completion date. We do know that Ms. Hansen wrote a
letter to Mr. Kullman indicating that “While Ms. Lowther confirmed the
retainage amount you indicated, she stated that Kullman was involved with
mold litigation and that liquidated damages would be assessed. While you
made us aware of the geotech claim, these undisclosed issues prevent us from
moving forward.” JX 1007 at 1.

There is no question, in other words, that Ms. Lowther’s comments
influenced Tatonka’s decision. What we do not know is whether Ms. Hansen
would have backed off from making a loan if her knowledge was limited to
what was true: namely, the contract was way behind schedule and KI and
DOS were in the middle of serious performance disputes.

Every contract carries with it the mutual exchange of promises not to
treat the other party in bad faith. Because government employees are

83
presumed to act in good faith, however, proof of breach of the implied
covenant not to act in bad faith carries a heavy burden for a contractor. The
burden can be met in circumstances, for example, in which government
officials act with specific intent to injure the other party, or by abusing the
government’s position to target the contract benefits negotiated between the
parties. See Centex Corp. v. United States, 395 F.3d 1283, 1308-09 (Fed. Cir.
2005).

We can credit the possibility that Ms. Lowther was angry at plaintiff
and less than careful in her comments to Ms. Hansen. KI had complained so
much about her performance as contracting officer that Ms. Lowther was
replaced for a time. See Tr. 505-06 (Lowther). Nor was she an impressive
witness at trial. She was frequently emotional and defensive. We assume that,
similarly, she would not have reacted well to the tension created in
contemplating terminating a contract of this size for default and may well have
resented KI’s continued efforts to get her to release funding. None of that
allows us to presume that Ms. Lowther intended to injure KI, however.
Indeed, we think it much more likely that she would have welcomed an outside
lender injecting enough money into the contract to keep plaintiff on the job.
We find that the most likely explanation of her comments to Ms. Hansen was
carelessness.

CONCLUSION

We conclude that KI cannot recover on its request for an equitable
adjustment for the geotechnical work, that the government has proved its
False Claims Act counterclaim, that the government has proved that the
termination for default was justified, and that plaintiff has proved that the
contract price must be adjusted to account for the constructive change order
with respect to the CAA. We reserve ruling on damages. The court will
contact the parties to arrange a status conference to address the damage
calculation and fraud counterclaim.

s/Eric G. Bruggink
ERIC G. BRUGGINK
Judge

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