Category Archives: Government Contracting

TERMINATION FOR CONVENIENCE IN FEDERAL GOVERNMENT CONTRACTS

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Termination for convenience clauses are standard (and required) contractual clauses in federal government contracts and will be read into the contract even if not specifically incorporated. See G.L. Christian and Assocs. v. U.S., 160 Ct.Cl. 1 (Ct.Cl. 1963).  The clause allows the government to terminate the contract at its discretion if it is in the government’s interest to do so.  Yet, even though the government (through the contracting officer) has discretion to exercise the termination for convenience provision, it cannot do so with “bad faith” or with an “abuse of discretion”, although proving that that the government acted in bad faith or abused its discretion is extremely challenging because government officials are presumed to act in good faith. See T&M Distributors, Inc. v. U.S., 185 F.3d 1279 (Fed. Cir. 1999).  The Court of Federal Claims explained this challenging legal standard to establish that the government improperly exercised its termination for convenience provision:

 

 

“The Federal Circuit—and the former Court of Claims—have recognized that an improper termination for convenience may give rise to a breach of contract claim when the agency (1) terminates the contract in bad faith or (2) abuses its discretion in its decision to terminate the contract. If a contractor can demonstrate that the agency’s termination for convenience was improper, the contractor will not be limited to damages identified in the termination for convenience clause. In such a case, traditional common law damages for breach of contract will be available to the contractor.

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Contractors face a high burden of proof for demonstrating an agency acted in “bad faith” by terminating the contract for convenience. To establish a breach based on bad faith in this context, the contractor must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.

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In determining whether the CO clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.”  TigerSwan, Inc. v. U.S., 110 Fed.Cl. 336, 345 (Fed.Cl. 2013) (internal citations omitted).

 

One instance of bad faith / abuse of discretion could arise if the government terminates the contractor simply to acquire a better bargain or price from another contractor.  See Krygoski Const. Co., Inc. v. U.S., 94 F.3d 1537, 1541 (Fed. Cir. 1996) (“A contracting officer may not terminate for convenience in bad faith, for example, simply to acquire a better bargain from another source.”).  Another instance of bad faith / abuse of discretion may exist if the government contracts with a party knowing full well that it has no intent to honor the terms of the contract. See Torncello v. U.S., 231 Ct.Cl. 20 (Ct.Cl. 1982).

 

This bad faith / abuse of discretion component to the exercise of termination of convenience provisions may also be applied if a prime contractor terminates a subcontractor on a federal project.  See Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221 (10th Cir. 1999) (explaining that if subcontractor proved termination was in bad faith it could have recovered breach of contract damages).

 

 

An example of standard termination for convenience language for fixed sum contracts is included in the Federal Acquisition Regulations, 48 CFR 52.249-2:

 

“(a) The Government may terminate performance of work under this contract in whole or, from time to time, in part if the Contracting Officer determines that a termination is in the Government’s interest. The Contracting Officer shall terminate by delivering to the Contractor a Notice of Termination specifying the extent of termination and the effective date.” (See also 48 CFR 52.249-6 which provides for standard termination for convenience language for cost-reimbursement contracts).

 

The termination for convenience language in the Federal Acquisition Regulations is substantially longer than what was provided above, but the point is that the government can simply terminate for convenience if it is in its interest.

 

When a fixed sum contract is terminated for convenience, the contract “is essentially converted into a cost reimbursement contract.”  White Buffalo Const., Inc. v. U.S., 52 Fed.Cl. 1, 3 (Fed.Cl. 2002).   The Federal Acquisition Regulations–sections noted above–govern what costs a contractor is entitled to recover when the contract is terminated for convenience.  Basically, “[t]he clause limits the contractor’s recovery to costs incurred prior to the termination, a reasonable profit on the work performed, and certain additional costs associated with the termination. Anticipatory profits and consequential damages are not recoverable.” Best Foam Fabricators, Inc. v. U.S., 38 Fed.Cl. 627, 637-38 (Fed.Cl. 197).  Thus, when a contact is terminated for convenience, the contractor cannot recover anticipated profits on the balance or unperformed part of the construction work.  To recover these damages, the contractor will need to argue that the government breached the contract by exercising the termination for convenience provision in bad faith or with an abuse of discretion. These damages are a major reason why a contractor would argue that the government wrongly exercised the termination for convenience provision.  See TigerSwan, 110 Fed.Cl. at 345.

 

If a contractor on a federal project is terminated for convenience or believes it will be terminated for convenience in the immediate future, it is imperative for that contractor to seek counsel to determine its rights.  These rights can include assistance in determining the recoverable costs under the Federal Acquisition Regulations and whether to pursue breach of contract damages for a wrongful termination for convenience for damages that would not be covered under the Federal Acquisition Regulations.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

TIME EXTENSIONS FOR “UNUSUALLY SEVERE WEATHER” ON FEDERAL PROJECTS

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What do you do if you encounter unusually severe weather? A time extension for unusually severe weather conditions is set forth under the default clause (such as 48 CFR 52.249-10) included in federal government construction contracts.

 

The clause typically provides in pertinent part:

 

“(a) If the Contractor refuses or fails to prosecute the work or any separable part, with the diligence that will insure its completion within the time specified in this contract including any extension, or fails to complete the work within this time, the Government may, by written notice to the Contractor, terminate the right to proceed with the work (or the separable part of the work) that has been delayed. In this event, the Government may take over the work and complete it by contract or otherwise, and may take possession of and use any materials, appliances, and plant on the work site necessary for completing the work. The Contractor and its sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated. This liability includes any increased costs incurred by the Government in completing the work.

(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—

(1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and

(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. The Contracting Officer shall ascertain the facts and the extent of delay. If, in the judgment of the Contracting Officer, the findings of fact warrant such action, the time for completing the work shall be extended. The findings of the Contracting Officer shall be final and conclusive on the parties, but subject to appeal under the Disputes clause.” 

48 CFR 52.249-10; see also 48 CFR 52.249-14 (regarding unusually severe weather as an excusable delay).

 

As reflected above, unusually severe weather is an excusable delay that will entitle the contractor to additional time to peform, but not additional compensation. However, not every weather event amounts to unusually severe weather. In order to be entitled to an extension of time for weather conditions, the contractor must produce evidence of the unusually severe weather event that it contends entitles it to additional time to perform. Edge Const. Co., Inc. v. U.S., 95 Fed. Cl. 407, 420 (Fed.Cl. 2010). “Unusually severe weather must be construed to mean adverse weather which at the time of year in which it occurred is unusual for the place in which it occurred. This condition is not established simply because weather charts may indicate that on a certain day the precipitation is greater than on some other days in some other year, since variance in weather patters is to be expected.” Broome Const., Inc. v. U.S., 492 F.2d 829, 835 (Ct.Cl. 1974). “Thus, unusually severe weather is determined based on a comparison of the conditions experienced by the contractor and the weather conditions of prior years.” Edge Const., 95 Fed.Cl. at 420.  Without proving that unusually severe weather impacted performance, the “delay was anticipated and agreed to by the parties…the Government [owner] is not obligated to anticipate acts of God and abnormal conditions that might interfere with contract performance. It is supposed that bidders allow for this in their bids.” Broome Const., 492 F.2d at 835.

 

Proving that there was unusually severe weather oftentimes requires providing weather data from the National Oceanic and Atmospheric Administration (“NOAA”) (sometimes in conjunction with expert testimony). NOAA is a federal agency that maintains past weather data and generates future weather forecasts. Sometimes there is an actual weather clause in the contract that provides baseline weather conditions for the project location obtained from NOAA to be used as a baseline for weather time evaluations.

The key is that if a contractor experiences an unusually severe weather condition that impacts its performance, it has the burden to support this weather condition (again, typically with data from NOAA) and timely notify the government / owner of the weather condition. A major reason to do this is that the contractor will want the time extension in order to extend the substantial completion date of the project which is the date that triggers the government’s assessment of liquidated damages if the contract is not substantially completed / performed by a specified date.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

“CRITICAL PATH” AND “CONCURRENT DELAY” BASICS AS INTERPRETED BY COURTS

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The terms “critical path” or “critical path method (CPM)” are frequently used terms in construction contracts and, importantly, delay-related claims.  These terms refer to the construction schedule and the method to establish delays to the substantial completion date.  To the construction participant,  specifically project management, these terms are must-know terms and are vital to the proper planning and management of the project!  A project is composed of many individual construction activities that are all interrelated.  Each activity has a scheduled duration or the number of days for the activity to be performed.  And, many activities cannot begin until predecessor activities are completed.  Project management needs to understand and appreciate all of this in order to successfully manage a project by the milestone substantial completion date that is agreed upon on the front-end.

 

 

Now, to the non-construction participant or lay person, the terms “critical path” or “critical path method (CPM)” do not mean much because they are not used in everyday language.  However, technical terms that are not part of everyday vocabulary need to be explained so that a lay person that is not a construction participant can understand and appreciate the significance of the terms–think judge or jury!   Oftentimes, the best way to explain the critical path is to analyze  court decisions that have interpreted this term in connection with a construction dispute.  The following are construction cases that have defined or interpreted the critical path:

 

CRITICAL PATH 

 

 

“The critical path is the longest series of the work activities through the performance of a whole project. If an activity on the critical path exceeds its scheduled duration, the termination of the project will be delayed unless some other activity on the critical path is performed in less than its scheduled time. A work activity not on the critical path may be completed later than its scheduled time without affecting the termination of the project unless the non-critical activity exceeds its “float” and thereby becomes an activity on the critical path.”

U.S. Fidelity & Guar. Co. v. Orlando Utilities Com’n, 564 F.Supp. 962, 968 (M.D.Fla. 1983)

 

“The project can be represented by a network of discrete paths that sequence interdependent tasks or milestones leading to project completion. The critical path, the longest path at any point in time, determines the project’s expected completion date.” 

Gulf Contracting, Inc. v. U.S., 23 Cl.Ct. 525, 529, n.2 (Cl.Ct. 1991)

 

 

“Essentially, the critical path method is an efficient way of organizing and scheduling a complex project which consists of numerous interrelated separate small projects. Each subproject is identified and classified as to the duration and precedence of the work. (E.g., one could not carpet an area until the flooring is down and the flooring cannot be completed until the underlying electrical and telephone conduits are installed.) The data is then analyzed, usually by computer, to determine the most efficient schedule for the entire project. Many subprojects may be performed at any time within a given period without any effect on the completion of the entire project. However, some items of work are given no leeway and must be performed on schedule; otherwise, the entire project will be delayed. These latter items of work are on the critical path. A delay, or acceleration, of work along the critical path will affect the entire project.”

Haney v. United States, 676 F.2d 584, 595 (Ct.Cl. 1982)

 

“Critical Path Methodology” (CPM) is a term of art for a method of scheduling and administering construction contracts. The Court of Claims has explained that CPM enables contractors performing complex projects to identify a critical path of tasks that must each be completed before work on other tasks can proceed. A delay on the critical path will thus delay the entire project: Essentially, the critical path method is an efficient way of organizing and scheduling a complex project which consists of numerous interrelated separate small projects. Each subproject is identified and classified as to the duration and precedence of the work. (E.g., one could not carpet an area until the flooring is down and the flooring cannot be completed until the underlying electrical and telephone conduits are installed.) The data is then analyzed, usually by computer, to determine the most efficient schedule for the entire project. Many subprojects may be performed at any time within a given period without any effect on the completion of the entire project. However, some items of work are given no leeway and must be performed on schedule; otherwise, the entire project will be delayed. These latter items of work are on the “critical path.” A delay, or acceleration, of work along the critical path will affect the entire project.”

Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1232-1233 (10th Cir. 1999)  (internal citations and quotations omitted)

 

 

As explained, construction schedules contain numerous activities that are interdependent on one another and are required to complete the project.  Each activity contains a duration required to complete the given activity.  Schedules typically identify the milestone of substantial completion.  Most schedules identify the critical path by tracking the longest duration path  through the activities to achieve completion.  If an activity on the critical path is not completed on time, it will delay the completion date.  Sophisticated scheduling software allows contractors to identify each activity’s early start date (earliest time an activity can start provided its predecessor activities are performed), early finish date (simply taking the early start time plus the scheduled duration), late start date (the latest time an activity can start without delaying the completion date by factoring in the scheduled duration), and late finish date (simply taking the late start time plus the scheduled duration).  By showing the early start date and late start date, project management is able to determine the float time with the activity.  In other words, if an activity has both an early start and late start date, the float allows an activity to be delayed from its early start date to its late start date without actually delaying the completion date of the project.  Naturally, there is much more to construction scheduling and determining the critical path (or revising the critical path during the course of construction) than this!  The point is that the critical path, as interpreted in the cases above, is critical because this is really how delays are proven on a construction project (whether the delays are used to offset liquidated damages, establish an entitlement to extended general conditions, or flow down extended general conditions and liquidated damages to the trade subcontractor responsible for the delay):

 

CRITICAL PATH USED TO PROVE DELAYS 

 

 

“Contractors have the burden of proving delays attributable to the Government. It may be impossible to establish government-caused [owner-caused] delays without a means of showing the critical path.”

Daewoo Engineering and Const. Co., Ltd. v. U.S., 73 Fed.Cl. 547 (Fed.Cl. 2006)

 

“In order to prevail on its claims for the additional costs incurred because of the late completion of a fixed-price government construction contract [owner contract], the contractor must show that the government’s [owner’s] actions affected activities on the critical path  of the contractor’s performance of the contract.  The reason that the determination of the critical path is crucial to the calculation of delay damages is that only construction work on the critical path had an impact upon the time in which the project was completed.  One established way to document delay is through the use of Critical Path Method (CPM) schedules and an analysis of the effects, if any, of government-caused events upon the critical path of the project.”

George Sollitt Const. Co. v. U.S., 64 Fed.Cl. 229, 240 (Fed.Cl. 2005) (internal citations and quotations omitted)

 

Sometimes, there are concurrent delays to the project occurring at the same time that both impact / delay the completion date.   Concurrent delays have been defined by courts as:

 

CONCURRENT DELAYS AND APPORTIONMENT 

 

 

 “The doctrine of concurrent delay involves the premise that where both parties to the litigation caused delays then neither party can recover damages for that period of time when both parties were at fault.”

Broward County v. Russell, Inc., 589 So.2d 983, 984 (Fla. 4th DCA 1991)

 

 

“Where both parties contribute to the delay neither can recover damage, unless there is in the proof a clear apportionment of the delay and the expense attributable to each party.”

Blinderman Const. Co., Inc. v. U.S., 695 F.2d 552, 559 (Fed.Cir. 1982) (internal citation and quotation omitted)

 

 

“Courts will deny recovery where the delays are concurrent and the contractor has not established its delay apart from that attributable to the government.”

William F. Klingensmith, Inc. v. U.S., 731 F.2d 805, 809 (Fed.Cir. 1984)

 

 

“[C]ontractor may not collect damages from the government due to delay where that contractor was itself in a state of concurrent delay. Generally, courts will deny recovery where the delays are concurrent or intertwined.  Even where both parties are responsible for delay, a contractor may not recover unless it is able to apportion the delay and expense attributable to each party.The burden of apportioning delay falls on the plaintiff. Courts will deny recovery where delays are concurrent and the contractor has not established its delay apart from that attributable to the government.”

Smith v. U.S., 34 Fed.Cl. 313, 325 (Fed.Cl. 1995) (internal citations and quotations omitted)

 

 

“The general rule barring recovery for government-caused unreasonable delay when there has been concurrent delay caused by the contractor does permit recovery, however, when clear apportionment of the delay attributable to each party has been established. Because the equitable adjustment claim for compensable delay is the contractor’s claim, the burden is on the contractor to apportion the delay between the parties. Generally, courts will deny recovery where the delays  are concurrent or intertwined and the contractor has not met its burden of separating its delays from those chargeable to the Government.”

George Sollitt Const. Co. v. U.S., 64 Fed.Cl. 229, 238-39 (Fed.Cl. 2005) (internal citations and quotations omitted)

 

 

This articles covers just the basic elements of critical path and concurrent delay based on interpretations from Florida and federal courts.  Understanding these terms and how courts have interpreted these terms is important so parties know what they need to do to prove a delay (and how they need to prove the delay and sustain their burden of proof) based on the factual dynamics and circumstances of their dispute.  Without this understanding, parties are not in the best position regarding developing strategy and themes associated with their case to assist is persuasively presenting testimony / evidence to support their position.

 

For more information on substantial completion, please see: https://floridaconstru.wpengine.com/what-is-substantial-completion/

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

ACCELERATION COSTS MONEY

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Contractors know or should know the concept of acceleration because acceleration costs money. Acceleration occurs when a contractor expedites its performance due to an excusable delay (a delay not its fault) in order complete its performance earlier than it would have considering the delay.

 

Contractors accelerate by incurring increased labor costs to work overtime and premium time (nights and weekends), adding more manpower, or adding more crews (which also may mean adding more supervision to supervise the additional labor). These added labor costs are typically direct payroll costs (factoring in labor burden) as well as equipment costs associated with operating the equipment (especially if it is owned equipment) for longer hours or renting additional equipment to be utilized by the additional manpower or crews. In addition, acceleration can result in inefficient labor hours because manpower is now working longer hours, new manpower is added and there is a learning curve associated with new manpower that is not familiar with the work, and the labor is potentially working under resequenced conditions and in congested locations with other trades. Thus, just because the contractor takes reasonable efforts to accelerate does not mean that it is incurring efficient / productive labor costs or that its acceleration efforts are substantially improving the completion date of the project.

 

There are two types of acceleration claims. The first type is the straightforward direct acceleration claim when the government/owner directs the contractor to accelerate its performance to finish the job in advance of the completion date. Many times, in this circumstance, the government/owner understands that it will need to compensate the contractor for the acceleration efforts.

 

Constructive acceleration is the other type of acceleration claim and the type more likely to lead to a dispute because the dispute centers around both entitlement and quantum. Constructive acceleration occurs where the contractor seeks additional time to complete the project due to what it claims are excusable delays, but the government/owner is unwilling to grant the contractor the additional time. To prove construction acceleration, the contractor needs to prove:

 

  1. there was a delay that was not its fault (an excusable delay) that impacted the completion date;
  2. the contractor notified the government/owner of the delay and requested additional time to complete its performance;
  3. the government/owner expressly directed the contractor to overcome the delay and complete the project in a shorter amount of time than the contractor was entitled to factoring in the delay or implicitly directed the contractor to overcome the delay through the refusal to grant additional time; and
  4. the contractor did in fact incur costs in accelerating its performance.

See Armour of America v. U.S., 96 Fed.Cl. 726, 757 (Fed.Cl. 2011) (“To prove a constructive acceleration claim, and entitlement to an equitable adjustment, which Armour [contractor] did not attempt to do during the proceedings before the court, a contractor must show (1) that the contractor encountered a delay that was excusable; (2) that the contractor requested from the government an extension of time due to the delay; (3) that the government denied the contractor’s request for an extension of time; (4) that the government demanded completion of the contract in a shorter amount of time than the contractor was entitled to, given the excusable delay; and (5) that the contractor was required to expend additional resources to adhere to the schedule on which the government insisted.”). See also Fraser Const. Co. v. U.S., 384 F.3d 1354 (Fed.Cl. 2004).

 

 

What is important to remember is not only will the contractor need to prove the excusable delay that impacted its schedule, but it will need to prove it notified the government/owner of the delay and requested additional time to perform which was denied. After proving all of this, the contractor will still need to establish that it actually accelerated its performance and incurred costs in doing so.

 

As a basic example, assume a project was to be completed December 31, 2014. This marked the date the owner needed to use the project for its intended purpose. However, due to excusable delays (assume many owner-directed change orders and/or design-related issues), this completion date is postponed a year to December 31, 2015. The contractor notified the owner of the delays and impacts to its schedule and requested an extension of time to complete the project; but, for whatever reason, the owner refused to grant additional time and implicitly demanded that the contractor complete the project on schedule. The contractor, as the result of the owner’s refusal to grant additional time, accelerated its performance to finish the project earlier than December 31, 2015 and to avoid the consequence of the owner assessing liquidated damages (i.e., the contractor accelerated to mitigate the impact of the delay). Based on the contractor and its subcontractor’s efforts, the project was completed on May 30, 2015–5 months after the original completion date, but 7 months before the contractor should have been complete considering the excusable delays. In this basic example, the contractor’s acceleration efforts mitigated the overall delay by approximately 7 months (the difference between May 30, 2015 and December 31, 2015) even though the contractor finished 5 months later than the original schedule. The contractor will need to prove the costs associated with these acceleration efforts.

 

It is good practice for contractors to work with attorneys and experts to preserve the acceleration claim and prove the excusable delays through a critical path schedule analysis and the costs incurred in accelerating performance.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

FALSE CLAIMS ACT–PROVING A FALSE CLAIM OR STATEMENT SUBMITTED TO THE GOVERNMENT

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The False Claims Act, without going into all of its intricacies, allows a private person (referred to as a relator) to file an action for the benefit of the government against a person/entity that violated the Act and submitted a false claim or false statement to the government. This action is known as a qui tam action when the private person–relator–files an action for the benefit of the government. When this occurs, the qui tam action is initially filed under seal and the government has the opportunity to determine if it wants to intervene and take over the prosecution of the action. A violation of the False Claims Act can subject the offending party to a civil penalty plus three times the amount of the government’s damages.  See 31 USCA s. 3279 et seq.

 

 

The benefit to the relator is that it is entitled to receive a percentage range of the amount the government recovers in the action based on whether the government took over the prosecution of the action or elected not to intervene. The relator is also generally entitled to its attorneys’ fees and costs.

 

 

Thee Middle District of Florida case, Prime v. Post, Buckley, Schuh, & Jernigan, Inc., 2013 WL 4506357 (M.D.Fla. 2013), is a recent case discussing the False Claims Act. In this case, the United States Army Corps of Engineers (“USACOE”) entered into a fixed-price indefinite delivery/indefinite quantity architect-engineering contract with a joint venture design professional firm (the “Firm”). The USACOE entered into the contract for the Firm to provide architectural and engineering services relating to everglades restoration work. The contract between the USACOE and the Firm included specific daily labor rates that the Firm was to charge for various personnel / labor (i.e., project manager, engineering technician, etc). The USACOE would give the Firm specific design professional tasks which would be negotiated into fixed price task orders (i.e, the specific task would be performed for a lump sum amount). The fixed price for the tasks would be determined by the type of labor used to complete the task times the number of man-hours. The price was then negotiated which included a component for profit for the Firm. Upon the completion of a task, the Firm would send an invoice to the USACOE for payment which was never questioned by the USACOE.

 

 

However, because the tasks were negotiated on a lump sum basis, USACOE representatives acknowledged that if it cost more for the Firm to complete the task, then the Firm was responsible for the overrun. Conversely, if the Firm could perform the work cost effectively by using lower cost labor to complete the tasks, then the Firm would keep the profit. This is the essence of a lump sum contract with the objective being to maximize the profitability by performing the work more cost effectively then negotiated. In other words, the actual costs to perform the work become irrelevant because the parties already negotiated a lump sum amount.

 
The plaintiff in this action was a former high-ranking employee of one of the design professional entities that formed the Firm. He was heavily involved in the negotiation of the contract and served on the management committee of the Firm for performing the work. At some point early on, plaintiff learned that the Firm’s profits were over 30% (and he felt that the profits should have been in the range of 8-10%). He learned the profits were greater because the Firm was using lower cost labor than the rates set forth in the contract. Yet, plaintiff, nearly seven years after the contract was executed, decided to discuss this issue with his boss. This issue was internally looked into and the Firm determined that it did nothing wrong. Shortly thereafter, plaintiff’s position with his design professional firm changed (a demotion) and his bonus and salary were reduced. Plaintiff was ultimately laid off due to lack of work.

 
Following plaintiff’s lay-off, he (as the relator) initiated this qui tam action under the False Claims Act for the benefit of the government. He argued that the Firm violated the Act by falsely impliedly certifying in in its invoices to the government by using cheaper labor and not disclosing true profits. (He also argued that he was terminated in violation of the Act although this portion of the case will not be discussed in detail other than that the plaintiff failed to prove he was retaliated against or terminated in violation of the whistleblower portion of the Act). The Firm argued that the task orders were fixed price task orders and they were entitled to keep any profit no different then they’d be liable for eating any losses.

 

  

To prove a claim under the False Claims Act, the plaintiff must establish the defendant made a false claim or statement. Prime, 2013 WL at *7. The Middle District explained:

 

 “There are two categories of false claims under the FCA: a factually false claim and a legally false claim. A claim is factually false when the claimant misrepresents what goods or services that it provided to the Government and a claim is legally false when the claimant knowingly falsely certifies that it has complied with a statute or regulation the compliance with which is a condition for Government payment.

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There is a further division of categories of claims as the courts have recognized that there are two types of false certifications, express and implied. Under the ‘express false certification’ theory, an entity is liable under the FCA [False Claims Act] for falsely certifying that it is in compliance with regulations which are prerequisites to Government payment in connection with the claim for payment of federal funds. There is a more expansive version of the express false certification theory called ‘implied false certification’ liability which attaches when a claimant seeks and makes a claim for payment from the Government without disclosing that it violated regulations that affected its eligibility for payment. Thus, an implied false certification theory of liability is premised on the notion that the act of submitting a claim for reimbursement itself implies compliance with governing federal rules that are a precondition to payment.”

Prime, 2013 WL at *7-8 quoting U.S. ex rel. Wilkins v. United Health Group, Inc., 659 F.3d 295, 305 (3d Cir. 2011).

The Middle District held that the plaintiff in this case failed to prove the “false” requirement and granted summary judgment for the Firm because the plaintiff failed to prove how the Firm violated the contract or federal law when the task orders were for fixed prices. The Court noted: “Here, the man-day labor rates in the Contract were set at fixed rates. Therefore, the Government knew, or should have known, that Defendants would reap the benefits of any cost savings, just as they would suffer the consequences of any cost increases.”

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE CARDINAL CHANGE DOCTRINE

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The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

 

In this case, the Court held:

 

“To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

 

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

 

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000).

 

The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

 

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

 

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

 

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

 

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.