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bb1
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Far be it for me to take an opposite angle of approach, but you say you spoke to someone about the excess on top of the PO. But in all honesty, did that person have the authority to say it was ok? And the people with the financial authority were oblivious to what was going on.

Personally I would pursue it as $40K is not a drop in the ocean, and sometimes verbal contracts are binding, but it depends who it was with. But at the end of the day you need to take some responsibility for letting it get to $40K, why would you even have let it get to this point, in particular when you knew it was outside of scope.

This could be a very expensive lesson