Tag Archives: constructive change

RULING DEALING WITH CONSTRUCTIVE CHANGES, CONSTRUCTIVE SUSPENSION, AND THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

Posted on by

A dispute pending in the Armed Services Board of Contract Appeals (ASBCA) dealt with interesting legal issues on a motion to dismiss. See Appeals of McCarthy Hitt-Next NGA West JV, ASBCA No. 63571, 2023 WL 9179193 (ASBCA 2023). The dispute involves a contractor passing through subcontractor claims due to impacts caused by the COVID-19 pandemic and the government’s response to the pandemic. More particularly, the claim centers on the premise that the government “failed to work with [the contractor] in good faith to develop a collaborative and cooperative approach to manage and mitigate the impacts and delays arising from the COVID-19 pandemic.” See Appeals of McCarthy Hitt.

The contractor (again, submitting pass through claims from subcontractors) claimed: (a) constructive changes to the contract entitling it to an equitable adjustment under the Changes clause of Federal Acquisition Regulation (F.A.R.) 52.243-4; (b) construction suspensions of the contractor’s work entitling it to an equitable adjustment under the Suspensions of Work clause of F.A.R. 52-242-14; and (c)  the government breached the implied covenant of good faith and fair dealing.  Each of these legal issues and theories will be discussed below because they are need-to-know legal issues. Keep these legal issues in mind, and the ASBCA’s ruling on the motion to dismiss as its analysis may demonstrate fruitful in other applications.

(a) Constructive Changes

“To prevail upon a constructive change theory, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the added work was ordered, expressly or impliedly, by the government.” See Appeals of McCarthy Hit. 

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive change theory.  The ASBCA disagreed and found sufficient facts were pled to allege the government required the contractor (and subcontractors) to perform beyond the contract requirements.

For example, [the contractor] alleges that the [government] required it to comply with government guidance on COVID-19 and implement COVID-19 exposure control procedures; perform additional job safety analyses and task-specific analyses; create new health and safety signage; provide additional training; develop contact tracing, testing, and quarantine programs; impose quarantines and enforce return-to-work protocols; impose tool and shared surface disinfection  and cleaning requirements; comply with social distancing requirements; provide and utilize additional personal protection equipment; add air filtration systems; require temperature checks and daily health checks; permit additional breaks; provide for additional break areas; change office, break, and trailer spaces and configurations; change site logistics; and change crew compositions and work plans.

See Appeals of McCarthy Hit.

(b) Suspension of Work

To recover under the Suspension of Work clause, the contractor must show (1) that the contracting officer suspended the work; and (2) that the resulting delay was unreasonable. A constructive suspension occurs when, absent an express order by the contracting officer, the work is stopped for an unreasonable amount of time and the government is found to be responsible for the work stoppage. “A constructive suspension has the same effect and consequences as an actual suspension, and relief should be granted as if an actual suspension order had been issued.

See Appeals of McCarthy Hit (internal citation omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a constructive suspension theory.  The ASBCA disagreed and found sufficient facts were pled to support a constructive suspension.  For example, the contractor alleges:

[The government’s] actions and inactions in administering the Contract once the pandemic struck had the effect of unreasonably disrupting, delaying or hindering the work on the Project. For example, the complaint alleges that the government refused to work with [the contractor] to develop a collaborative and cooperative approach to manage the impacts caused by the pandemic, instead simply insisting that the work proceed on schedule, which had the effect of hindering and delaying the work unreasonably. The complaint also alleges that [the contractor] informed [the government] of the impacts of its action and inactions, but that [the government] refused to acknowledge that the work was being delayed.

See Appeals of McCarthy Hit.

(c) Implied Covenant of Good Faith and Fair Dealing

Like every contract, the Contract here contained an implied duty on each party to perform with good faith and fair dealing. The implied duty “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprivethe other party of the contemplated value.” A breach occurs when a party violates its obligation “‘not to interfere with the other party’s performanceand not to act so as to destroy the reasonable expectations of the other party regarding the fruits of the contract.”’ The implied duty “‘cannot expanda party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.”’

See Appeals of McCarthy Hit (internal citations omitted).

The government moved to dismiss this claim arguing the complaint did not allege sufficient facts to support a breach of an implied covenant and good faith and fair dealing claim.  The ASBCA disagreed and found sufficient facts were pled to support this claim. For  example, the complaint alleges:

“[A]fter the pandemic struck, the government declined to cooperate with it in managing or addressing the impacts, which were severe andunexpected. Rather, it is alleged, the government insisted that [the contractor] and the Subcontractors continue to perform as though nothing ofconsequence was occurring, used the DO-C2 rating as a means of exerting pressure to maintain the schedule at all costs, and was non-responsiveto requests for help in complying with all the new and changing requirements placed upon [the contractor] and the Subcontractors. Theseallegations suggest that the government essentially left [the contractor] “twisting in the wind” by insisting on uninterrupted performance in the faceof extraordinary circumstances and are sufficient to make out a plausible claim for a breach of the duty of good faith and fair dealing.

See Appeals of McCarthy Hit (internal citations omitted).

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 RISK OF A FIXED PRICE CONTRACT IS THE MARKET

Posted on by

When performing work on a fixed price or unit, there is risk that is being assumed on your end.  One risk is the market.  You are ultimately banking on the fact that the market is not going to make your fixed prices unprofitable.  That’s not an unforeseeable occurrence because the market shifts and that shift can have a negative ripple effect.

In a recent case out of the Federal Circuit, U.S. Aeroteam, Inc. v. U.S., 2022 WL 243176 (Fed.Cir. 2022), this market risk played a role in a fixed price contract. Here, a contractor was hired by the federal government to produce ground support trailers. A key component of these trailers was a running gear.  The contractor relied on a vendor for these running gears. Due to financial difficulties, the vendor had to raise its unit price for the running gears.  Based on the increased price, the contractor elected to manufacture the running gears itself. The contractor asked the government if this was ok and the government approved the request.  Once the contractor started manufacturing these running gears, it had an “awe” moment – the manufacturing costs were higher than anticipated.  The contractor submitted a request for equitable adjustment which the government denied.  The Contractor than sued the government raising three arguments to support its entitlement to additional costs: (1) constructive change; (2) cardinal change; and (3) commercial impracticability.  The contractor lost on all arguments.  It probably should have lost on all arguments.

Constructive Change

“To demonstrate a constructive change, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the additional work was ordered, expressly or impliedly, by the government.” Aeroteam, supra, at *2 (internal citations and quotation omitted).

The problem with this argument was that the government did NOT order the contractor to manufacture the running gears.  It merely approved the contractor’s request. The contractor made the decision since it thought it could manufacture the running gears when its vendor increased the unit price. An approval of a request, is NOT an order.  Aeroteam, supra, at *3.

Cardinal Change

A cardinal change, discussed in prior postings, “is so profound that it is not redressable under the contract, and thus renders the government in breach.” Aeroteam, supra, at *3.

The problem with this argument was there was no alteration in the contractor’s contract.  The contractor chose to manufacture the running gears and it was not forced to do this by the government.

Commercial Impracticability

“To prove commercial impracticability, a contractor must show that because of unforeseen events, [the contract] can be performed only at an excessive and unreasonable cost or all means of performance are commercially senseless.” Aeroteam, supra, at *4 (internal citations and quotation omitted).

The problem with this argument was that the contractor could have used its vendor to manufacture the running gears at a higher unit cost.  The contractor did not want to pay the higher unit cost. Moreover, there was no evidence that the higher unit price was even excessive. In this regard, the Court expressed that an increase in market price of the running gears is the risk the contractor assumed in a fixed price contract.

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.

 

CONSTRUCTIVE CHANGE DIRECTIVES / DIRECTED CHANGES

Posted on by

shutterstock_716540956Prime contracts typically contain a constructive change directive clause.   A constructive change directive also goes by the acronym CCD (and for purposes of this article, such changes will be referred to as a CCD), however it can also be known as a Work Change Directive, Interim Directed Change, or Directed Change, depending on the type of contract beign utilized.   An owner can order a CCD, versus issuing the contractor a formalized change order, as a mechanism to direct the prime contractor to perform work if there is a dispute as to contract amount, time, or scope.  Just because an owner issues a CCD does not mean the owner is conceding that it owes the contractor a change order.  Rather, the owner is ordering the CCD as a mechanism to keep the project moving forward notwithstanding a disagreement with the contractor as to the price or time impact.  Standard form construction agreements such as the AIA, EJCDC, or ConsensusDocs, will have a standard provision dealing with change directives where the owner can order the contractor to proceed with work in the absence of a change order.  In the federal government context, most construction contracts will contain a changes clause that authorizes the government to formally direct changes; and, there is authority for contractors to equitably pursue a constructive change based on certain directives or instructions issued by the government.  Naturally, from the contractor’s perspective, this CCD provision is an important consideration as it could likely require the contractor to finance a change to the owner’s project, particularly if there is a scope dispute where the owner does not believe the contractor is entitled to any change order.  

 

An example in the federal government context can be found in the Armed Services Board of Contract Appeal’s decision in Appeal Of – Buck Town Contractors & Co., ASBCA No. 60939, 2018 WL 679564 (2018), dealing with the reconstruction of a hurricane protection levee.  The prime contract required the contractor to place a layer of geotextile material at the base of the levee.  The specifications required the material placed such that all seams and overlaps were installed perpendicular to the centerline of the levee.  The contractor’s subcontractor, however, placed the geotextile material such that overlaps ran parallel (not perpendicular) to the centerline of the levee.   The government objected to the method of the contractor’s placement of the geotextile material and directed the contractor to remedy the incorrect method (i.e., redo the incorrect work).   The contractor interpreted this instruction or directive as a constructive change directive and submitted a Request for Equitable Adjustment (REA) associated with the directive claiming that it installed the geotextile material based on the interpretation of other provisions in the specifications.  The government denied the REA and the contractor followed-up with a formal claim, which was also denied.

 

The Armed Services Board of Contract Appeals ultimately held that the prime contractor was not being directed to perform additional work, or work contrary to the contract.  The Board found that the contract required the contractor to place the geotextile material so that all seams and overlaps were perpendicular to the centerline of the levee, which necessarily prohibits the contractor from placing seams and overlaps parallel to the centerline.   As a result, the directive for the contractor to redo work was not a constructive change that authorized the contractor to additional compensation.

 

As mentioned above, the CCD provision is a valuable provision for owners in prime contracts to keep the project moving forward.  Contractors need to consider this clause in conjunction with instructions and directives received from the owner during the course of construction that authorizes the contractor to perform claimed additional work as such work can have both a cost and time impact.   If the requirements of the contract are changed and the contractor is directed to proceed with additional work, it is important that the contractor consider the directive in accordance with the provisions of its contract and preserve its rights and notify the owner accordingly. 

 

 

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.

 

 

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

Posted on by


Federal government construction contracts contain a changes clause.  The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting).  This changes clause allows the government, through the contracting officer, to direct changes to the construction contract.  It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

 

Formal / directed changes issued to the prime contractor by the government are easy to comprehend.  These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

 

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

 

“A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents.  The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

*** 

There are two basic components to the constructive change doctrine-the change component and the order/fault component.  The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

***

A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work.  The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

 

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA.  An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government.  Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10th Cir. 1999).   “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

 

 

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury.  P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003).   The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.”  Morrison Knudsen Corp., 175 F.3d at 1244.  Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.”  Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

 

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract.  If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change.  It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

 

 

 

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

 

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.