ECONOMIC WASTE DOCTRINE AND CONSTRUCTION DEFECTS / NONCONFORMING WORK

Posted on January 21, 2023January 21, 2023 by David Adelstein

I recently did a presentation on the economic waste doctrine. It is an applicable doctrine dealing with construction defects and nonconforming work. When it comes to construction defects and nonconforming work, EVERYTHING starts with your measure of damages. How are you going to prove your damages? Next, what evidence are you going to use to prove your damages? Or, what are the defenses and how do you prove those defenses to a construction defect and nonconforming work claim including the economic waste doctrine?

If you are interested in learning more, the below presentation can shed detail. However, don’t rely on the presentation in a vacuum. Work with knowledgeable construction counsel (like me!) that can best position your case whether you are the one proving construction defects and nonconforming work or the one defending against such a claim. This way, if you are arguing economic waste, you are not just throwing it out there, but you are arguing it to actually mean it!

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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.

IS THE REMOVAL AND REPLACEMENT OF NONCONFORMING WORK ECONOMICALLY WASTEFUL?

Posted on August 21, 2022August 21, 2022 by Edward Garber

There are times a contractor installs the wrong material or system contrary to the plans and specifications. A nonconformity. The owner wants the already-installed material or system to be replaced in conformity with the plans and specifications. However, what was installed is functionally equivalent to what the plans and specifications required and would be cost prohibitive, i.e., economically wasteful. If the contractor elects to remove and replace the nonconforming work, it may seek a change order because it is economically wasteful. Or, the contractor may refuse (typically, not the best approach) in furtherance of taking on the fight based on the economic wastefulness associated with the removal and replacement. A recent case, David Boland, Inc. v. U.S., 2022 WL 3440349 (Fed.Cl. 2022), talks about this exaction situation and the economic waste doctrine. This is an important doctrine for contractors to understand when faced with a similar predicament.

Here, a contractor was hired by the government to construct a wastewater collection system that was to be owned and operated by a private company. The contractor’s work was going to be incorporated into a larger sewer system that the private company already operated. The contractor was required to install sewer manholes reinforced with steel in accordance with an ASTM standard. The manholes could be rejected if they did not conform to the ASTM standard. Compliance with this ASTM standard was also required by the private company’s construction protocol for the infrastructure, which was incorporated into the contractor’s contract with the government. The contractor was required to strictly comply with the contract.

As it turned out, the contractor did not install sewer manholes reinforced with steel. Instead, nineteen installed manholes were reinforced with synthetic fiber. The contractor requested a variance from the government suggesting certain guarantees and fixes. They were not accepted by the government or private company. The government directed the contractor to remove and replace the manholes reinforced with fiber instead of steel. The contractor did so at the cost of $3.5 Million and sought its costs from the government under the economic waste doctrine.

The contractor claims when it sought its variance it provided an expert opinion that the “fiber-reinforced manhole sections could be expected to serve their purposes as well as steel-reinforced ones.” David Boland, supra at *3. The government, through an expert, opined that fiber-reinforced manholes were more likely to have undetected defects that could reduce the manholes’ service life. The private company also did not accept the fiber-reinforced manholes and there was an issue as to whether guarantees offered by the contractor were equivalent to assurances the private company was to receive from the government. In other words, there was a dispute as to the functional equivalence of fiber-reinforced versus steel-reinforced manholes.

Whether the contractor would be entitled to the removal and replacement costs hinges on whether such work was economically wasteful. While this determination would be through the trier of fact on a later date, the Court’s discussion of the economic waste doctrine is a worthwhile discussion for consideration where the issue was whether the $3.5 Million to remove and replace nineteen fiber-reinforced manholes with steel-reinforced manholes was economically wasteful.

A contractor can recover correction costs under the economic waste doctrine when two elements are met: “[1] [T]he cost of correction is economically wasteful and [2] the work is otherwise adequate for its intended purpose.” When those elements are met, the government may obtain a downward adjustment of the contract price, but it is liable for net correction costs if it orders replacement of the contractor’s work.

As to the first element, a cost of correction is “economically wasteful” when it is disproportionate to the loss of value that resulted from noncompliance. As to the second, work is “adequate for its intended purpose” when it “substantially complie[s]” with contractual specifications. A contractor’s performance can be substantially adequate when it “departs in minor respects from that which ha[s] been promised,” but not where it is “fundamentally less than [what the parties] had … bargained for.” Substantial compliance is a factual question that “depend[s] in large measure upon the character and extent of the partial failure — upon its relative importance to the party affected by it.”

The underlying substance of the test is less complicated than it might seem. Both elements depend on comparing the value of the contractor’s actual performance with the performance the contract would have strictly required. The burden is on the contractor to prove that its rejected work (or proposed correction) substantially complied with the contract.

Two aspects of the economic waste doctrine deserve emphasis. First, the doctrine applies even where — as here — the contract calls for strict performance. As the Granite Construction court explained, although the government “generally has the right to insist on performance in strict compliance with the contract specifications and may require a contractor to correct nonconforming work[,] … the government should not be permitted to direct the replacement of work in situations where” the economic waste doctrine applies.

Second, when resolving factual questions about the adequacy of a contractor’s original nonconforming work, a court should look to all the evidence developed in litigation, not just the information available to the government at the time it ordered the work to be corrected.

David Boland, supra, at *4 (internal citations omitted).

SUBSTITUTING MATERIALS AND FAILURE TO COMPLY WITH CONTRACTUAL REQUIREMENTS

Posted on November 7, 2021November 7, 2021 by Edward Garber

It is important to remember that if you are going to substitute materials from those specified, you need to make sure there is proper approval in doing so–make sure to comply with the contractual requirements to substitute materials. Otherwise, you could be in a situation where you are contractually required to remove the installed substituted materials and replace with the correct specified materials. This is not the situation you want to find yourself in because this is oftentimes a costly endeavor. This was the situation in Appeal-of-Sauer, Inc., discussed below, on a federal project. The best thing that you can do is comply with the contractual requirements if you want to substitute materials. If you are in the situation where it is too late, i.e., you already installed incorrect materials, you want to demonstrate the substituted materials are functionally equivalent to the specified materials and/or come up with an engineering solution, as required, that could be less costly then ripping out the installed material and replacing with the correct material. Even doing so, however, is not a “get out of jail free card” and does not necessarily mean there is not a strong basis to require you to install the correct specified material.

In Appeal of- Sauer, Inc., ASBCA 61847, 2021 WL 4888192 (ASBCA September 29, 2021), a federal project’s engineering requirements required cast iron piping for the above ground sanitary system. However, the prime contractor installed PVC piping instead of cast iron piping. The prime contractor believed it had the appropriate approval through its submittal. The government, through its contracting officer, directed the prime contractor to remove installed PVC piping to replace with cast iron. The government did not believe PVC piping was the functional equivalent of cast iron piping for the above ground sanitary system due to its concern with the noise level of waste materials flowing through the piping. The prime contractor submitted a claim for its removal and replacement costs which was denied by the contracting officer. On appeal with the Armed Services Board of Contract Appeals, the Board agreed with the contracting officer explaining: “While we agree that a design change could be approved by the designer of record and brought to the attention of the government before being incorporated into the design documents, the [prime contractor’s] task order required that such a design change meet the minimum requirements of the solicitation and accepted proposal. The plumbing submittal [the prime contractor] issued here, showing the use of PVC instead of cast iron for the above ground waste piping, did not meet the minimum requirements of the solicitation.” Appeal of-Sauer, Inc., supra.

The prime contractor argued the government approved the deviation and use of PVC by another government representative. This argument failed because only the contracting officer had the authority to change a contract or task order. Appeal of-Sauer, Inc., supra (citing FAR clauses that reference that only the contracting officer has authority to modify or deviate from a contract).

Next, the prime contractor argued estoppel and waiver in that government personnel were present and observed the construction of the above ground sanitary piping with PVC and waited 16 weeks before directing the prime contractor that it could not use PVC piping. The prime contractor argued this unreasonable delay should be deemed the government constructively accepting PVC and the government either waived the right to demand strict compliance with cast iron or should be estopped from demanding such compliance. This argument failed:

Here, only the contracting officer could vary the task order requirements. Therefore, to establish waiver, [the prime contractor] must demonstrate that the contracting officer knowingly rescinded the government’s right to require compliance with a task order minimum requirement. Even assuming government personnel on site may have observed the installation and use of PVC pipe, there is no evidence that the contracting officer knowingly waived the task order requirement.

The government is generally entitled to insist upon strict compliance with the contract specifications and to require correction of nonconforming work. There are instances, however, where the government may waive strict compliance with contractual requirements and is estopped from later re-imposing those requirements upon the contractor. These cases require knowing failure to exact performance – presumably by one with authority to waive contractual terms.

Appeal of-Sauer, Inc., supra (internal quotations mitted).

Lastly, the prime contractor argued under the economic waste doctrine—that removing the PVC and replacing it was cast iron constituted economic waste, particularly since PVC and cast iron piping are functionally equivalent. “To establish economic waste, the work performed must substantially comply with the specifications; the work must be adequate for the intended purpose; and the cost of correction must be economically wasteful. Economic waste does not ipso facto excuse non-performance but serves to limit excessive damages for repair of non-conforming work.” Appeal of-Sauer, Inc., supra(internal quotation omitted).

The Board found that economic waste did not apply because the prime contractor did NOT substantially comply with the specification and PVC was not the functional equivalent to cast iron based on the intended application (which was to control the noise level and sound transmission of waste materials flowing through the piping). Further, while the government was receptive to another remedial measure, none was offered to the government.