Tag Archive for: lawsuit


There are 3 important causes of loss profit (or loss fee) litigation in government contracts.  Loss profit calculations are based primarily on a contract and a defined period of time (i.e. contract term). Scope creep, subcontractor disputes, and delays are the most common causes of loss profits/fees when performing work on federal contracts.  All stem from a failure to clarify contract or subcontract language before work begins and/or during the contract performance (i.e. modifications and change orders).

Scope Creep

Scope creep ensues when the customer begins to request work that is not specified in the original contract, task order or subsequent modifications.  T&M contracts tend to be less affected by scope creep due in part that all work is billed by the hour and materials requested by the customer are passed through.  Albeit, they are still at risk of loss profits due to the lack of clear agreement as to the payment of the additional number of hours to be billed and/or written requests for additional materials and other direct costs.  A significant impact of scope creep falls on firm fixed price contracts and cost reimbursable contracts with caps on fee or profit.  When I say firm fixed price, we’re not talking about Fixed Price Level of Effort (FPLOE) as these contracts are issued as a roundabout way of issuing a T&M contract.  FPLOE contracts, like T&M contracts and task orders may create a loss profit scenario due to caps on the amount of hours allowed in the contract and if there are no clear definitive milestone or deliverables that must be met.

Loss profits are realized when the government requests changes to the contract scope that they feel are in line with the current contract, but do not provide any additional funding or man-hours into the contract.  In this case, your loss profits would be:

Scenario #1 

Hours for additional work not in contract scope = Scope Creep Hours

Scope creep hours X negotiated T&M billing rates for those labor categories = LOSS PROFITS

In some cases, and depending on the language in the contract clauses, you may be only able to claim the actual cost of the direct labor to perform the additional work plus applicable indirect burdens.

Scenario #2

Cost of additional work requested on a fixed price contract or additional deliverables + applicable burdens = LOSS PROFITS

Since circumstances vary, one may argue that a company is also entitled to the average realizable fee on those contract costs, as well.

Subcontractor disputes with prime contractor

Subcontractor and prime contractor disputes have probably gone on since the beginning of time.  They are no different in the world of government contracts.  Typically, the subcontractor was used in the bidding proposal for a significant portion of work, then when it is contract performance time, the subcontractor’s portion is cut back significantly.  In this situation, loss profits would be calculated as the profits on the work promised but not granted.  In addition, a claim may be made for the salaries of employees hired and being paid to sit on the bench for the promised work.  If the contract has ended, the period under review and used in the calculation would be the entire subcontract period.  Moreover, some states may take into consideration mitigating factors such as the ability to put those employees on another contract.  In this case, the loss profits from contract A would be reduced by the profit earned on those employees moved to contract B.


Delays in contract performance by the government, prime contractors or even subcontractors can be cause for loss profits.  Loss profits or loss fees are experienced in contract delays when payroll, benefits and other costs of operations must still be paid in order to stand ready to continue on a project when it “restarts”.  Also the cost of replacing people that could not be financially support during the delay can be cause for loss profit litigation.

The key to avoiding the need to engage in loss profits litigation is to make sure to carefully read your contract and have an attorney review it as well.  Also, understand, with certainty, the scope of the work to be performed.  Any changes outside of the scope should be made in writing including the exact change in work, amounts to be paid, and any limitations.  If you do wish to pursue litigation, engage a CPA certified in forensic financials to assist with calculating whether it is worth your while.



Contributed by Cheryl Jefferson Cooke, CPA / CPFF

An expert witness is someone who by virtue of training, skill, education or experience is believed to have knowledge or expertise in a certain subject beyond an average person. This knowledge makes the person eligible to be a witness in a case they otherwise may have no interest in. Expert witnesses are often brought in by legal teams to help the court understand complex matters in more detail.

Experts ranging from doctors to security officers often appear as witnesses. In most cases, they help shine a light on crucial information in a case, as well as assist in winning the influence of the judge or jury.

Similar to any other field of expertise, accounting requires expert witnesses. Accounting often involves complicated financial reporting and concepts. Therefore, it is important to bring in an expert witness who will be able to undo accounting jargon for lawyers, judges, and the jury. Accountants are often viewed as credible and ethical people and their involvement in a case might play a significant role in convincing the jury in a subconscious way.

Why Require an Accountant as an Expert Witness?

Some of the reasons we require accounting expert witnesses depend on the particular case involved. An accountant can be brought in to testify in a case for any of the following reasons:

1.Credentials and Credibility

Credentials for an accountant expert witness, just like credentials for all other expert witnesses, are essential. An expert accountant witness should at least be a certified public accountant (CPA). There may be a variety of certifications that might qualify the witness on accounting, but being a CPA is preferred because CPA is a state-licensed certification.  Another important credential for matters of forensic accounting or litigation support is Certified in Forensic Financials (CFF), and only a CPA can earn this credential.

The experience a person has in accounting is also vital as one can draw comparisons from past work. This can also be of great help if an accountant has had past experiences with government contracts, service industries, or small businesses, as these are specialized experiences.

Data presented and explained by an experienced and well-trained CPA will lend to the case.

2. Analyzing and Interpreting Data

Accounting is known for the presentation of data such as the cash flow statement and income statements. These are not terms members of the court may understand. This is where the accountant comes in. They will help in matters such as contract disputes, fraud investigations, accounting, and audits. The interpretation of the numbers on these reports will then be explained in simpler terms for the court.

3. Communicating in Non-Accounting Terms

We have already established that accounting often uses phrases and presentations that are not friendly to a non-accounting audience. However, accountants who have accumulated a lot of experience in different accounting issues are not likely to face the challenges of clarifying these ideas. A good expert witness can explain complicated financial terms and interpretations in layman’s terms, so it is most useful for decision making.  This is where experience communicating with small business owners becomes a desirable skill since most are unfamiliar with accounting terms.

4. Litigation Support

Litigation support is a service offered by CPAs. It is a specialized accounting service that helps businesses and attorneys with complex accounting problems such as legal disputes, damage calculations, and fraud. An experienced CPA with the CFF credential is in a position to analyze, report, and testify as an expert witness if needed. This specialization makes a CPA/CFF the ideal expert witness.

When it comes to bringing an expert witness to the stand to testify, it should be someone who is an authority in their field. This same concept applies to accounting – put your trust in a firm that has a proven litigation support track record and will understand your needs.

If you have a question about hiring CJA as an expert witness for your legal needs, contact us.