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Recently on the blog, I covered one of the major risks encountered by construction contractors – subsurface or unexpected physical conditions discovered after the work begins (commonly known as  Differing Site Conditions under Federal Acquisition Regulation (FAR) 52.236-2).

In that post, I explained that a government contractor that uncovers a Differing Site Condition on a federal project must take three basic steps:

(1) Properly document the condition

(2) Notify the government, and

(3) Preserve the right to bring a Request for Equitable Adjustment or Certified Claim.

Today, I’d like to drill down on the second requirement – providing proper notice to the government – by examining a recent decision from U.S. Court of Federal Claims (COFC).

The case concerned a contractor seeking additional compensation in connection with its performance of a construction contract with the International Boundary and Water Commission (for the widening and rehabilitation of the top surface of the Urban Presidio Level in Presidio, Texas).  The contractor was required to test the embankment soil to ensure compliance with certain performance specifications, including moisture content and compaction.

The contractor struggled to achieve the required soil conditions and, accordingly, experienced project delays.  The contractor sought to shift responsibility for the delays to the government, arguing that it was required to place the embankment material over an “unacceptable, non-constructible subgrade.” Specifically, the contractor alleged that the contract documents misrepresented the site’s subgrade conditions, resulting in a differing site condition under FAR 52.236-2.

The government sought summary judgment on the contractor’s claim based on an allegedly unreasonable contract interpretation.  That is, the government argued that no reasonable contractor would have interpreted the contract documents as indicating that the project’s subgrade would meet the embankment specifications.  Additionally, the government claimed that – even if there was a differing site condition – the contractor failed to provide adequate notice.

On the latter point, the contractor did not dispute that it failed to provide formal notice, but nevertheless argued that the government was “constructively” on notice of the subgrade condition.  The COFC disagreed, finding that “constructive notice” may only take the place of actual notice where there is no prejudice to the government.  Simply stated, the contractor must communicate with the contracting officer when or if it discovers a condition that does not meet its expectations.

In this case, the contractor did not provide such notice and, moreover, waited for more than a year to raise the issue through a request for equitable adjustment.

The takeaway for contractors is an easy one – communicate, communicate, communicate.  Regular updates to the government are probably part of your contract anyway, but regardless, should be part of your firm’s best practices.  If a differing site condition is encountered, providing notice to the government pivots from a best practice to an absolute necessity.

 

51111658 - don't wait cartoon alarm clock
51111658 - don't wait cartoon alarm clock

Do contractors need to wait for a project to be complete to file a delay claim? The answer is a resounding NO! There is no reason for a contractor to finance a government-caused delay for any longer than absolutely necessary.

The Civilian Board of Contract Appeals (CBCA) recently drove this point home in CTA I, LLC v. Department of Veterans Affairs, CBCA 5826 (2018). In that case, CTA filed an Appeal in August 2017 seeking approximately $2 million in delay, inefficiency, and other costs for impacts occurring between notice to proceed and September 30, 2016. To date, the project is still not complete and the contractor is showing a contract completion date of November 2018, which is over three years late.

Near the close of discovery, the VA moved to stay the Appeal until contract completion on the grounds that until the contract is complete, the full delay impact is unknown.

The CBCA rejected the VA’s motion to stay, noting:

CTA is entitled to try to prove at this juncture that the VA caused compensable delay to activities on the critical path up to and including September 30, 2016, thereby delaying the future completion date. CTA need not wait until contract completion to litigate its delay claim for that completed, discrete period. Indeed, the very thing that defines work on the critical path is that the work has no leeway and must be performed on schedule; otherwise, the entire project will be delayed.

The CBCA further noted that the Suspension of Work clause requires contractors to submit delay claims “as soon as practicable.” Nothing in the FAR requires contractors to wait until contract completion to file a delay claim.

Takeaway:

If a contractor encounters a delay impact, it need not wait until contract completion to submit a delay claim. The process of litigating a delay claim to judgment is surprisingly lengthy and it is often in the contractor’s best interested to get the process started. An added benefit of filing your claim during contract performance is the early accrual of Contract Disputes Act (CDA) interest, which begins to accrue the date your claim is filed.  Although the current CDA interest rate of 2.625% is relatively low, given the size of the claim and the length of the dispute, CDA interest can grow to be quite substantial.

The Contract Disputes Act (CDA) provides a remedy for contractors seeking to recover additional time or costs on a government contract (as part of a Claim or Request for Equitable Adjustment).  But when the basis for recovery is tied up in a contract modification, contractors must beware the agency’s standard waiver language – or risk losing the battle before it even begins.

The government utilizes contract modifications to implement any number of contract changes, ranging from minor adjustments to major alterations.  Modifications come in two general varieties:  Unilateral (the government directs the contractor to perform without negotiation) and Bilateral (the government and the contractor agree and both sign off on the change).

Bilateral changes can present a major stumbling block when the government and the contractor are on different pages when it comes to the terms of the change.

Bilateral changes very often include waiver language releasing the agency from any future claims for compensation (time / costs) arising out of the change that are not included in the modification.  Contractors must therefore be conscious of: (1) the compensation included in the modification and (2) whether that compensation makes the contractor whole.

If the contractor believes the terms of the modification fall short, it must specifically reserve the right to pursue damages at a later date before signing.

The importance of modification waiver language was highlighted in a recent Court of Federal Claims (COFC) case involving alleged delay damages on a U.S. Army contract related to the construction of water bottling facilities in the Middle East during the Iraq War.

As one part of the multifaceted claim, the contractor sought to recover based on alleged government-caused delays to the completion of a bottling plant.  The plant was the subject of two separate contract modifications – but the contractor argued that the modifications did not address the specific issue of delay (and, therefore, that it retained the right to seek the costs associated with the delay as part of the appeal).

The government, on the other hand, argued that the delay was incorporated as part of the second modification and therefore released by the contractor through the modification’s standard waiver language (under the legal theory of accord and satisfaction).  The Court sided with the government – specifically relying on the contractor’s failure to include a reservation of rights before signing the second modification.

The takeaway for contractors is clear:  Read and understand your modifications – and if there are any discrepancies, be crystal clear about reserving the right to seek compensation at a later date before you sign.

Understanding claims under the Contract Disputes Act is an essential skill for government contractors.  Claims (and related requests for equitable adjustment) are by far the most common remedy for contractors seeking to recover additional time and/or costs from the agency administering the contract.

Part of understanding the claims process is appreciating what kind of impacts do – and do not – lead to recovery for the contractor.  For example, and as I’ve covered before, contractor claims often arise in the context of differing site conditions (i.e., a subsurface, latent, or unknown physical condition at the project site that differs materially what is indicated in or anticipated under the contract).  In order to successfully pursue a claim for a differing site condition, the contractor must understand the concept of “reasonable foreseeability” and document the actual damages incurred due to the changed condition.

Contractors seeking to recover based on project delays must conduct a related – but distinct – analysis.  Generally speaking, the agency administering the contract is bound to act reasonably and timely respond to the contractor.  If a contractor submits an RFI and does not receive a timely response (based either on a contract requirement or other reasonable standard), the government could be on the hook for the time and costs extending out from that delay.

However, any contractor seeking to recover for a delay must first be sure that its own house is in order – that is, that it acted in good faith in interpreting and performing the contract.  A good example is presented in a recent Armed Services Board of Contract Appeals decision, where the Board denied the contractor’s claim for costs relating to alleged government delays.

The contract at issue was for the repair and calibration of a U.S. Air Force power supply unit.  During its performance, the contractor claimed that it submitted requests for clarification related to its duties under certain contract CLINs.  Because the agency did not timely respond to those requests (the contractor argued), the government bears responsibility for the corresponding delays.

In response, the agency offered a simple yet effective defense:  If the contractor consulted its PWS, all of its questioned would have been answered in full.  The Board agreed with the government.  According to the decision, there was no evidence that the contractor was somehow prevented from accessing the PWS and – even though the government certainly could have been more cooperative – all of the information allegedly sought by the contractor was available in the PWS.

The case obviously presents an extreme example – reading the contract would seem to be an essential first step for every new project – but the lesson is still the same.  The government can bear responsibility for delays, but the claim will far easier to support if there are not overriding or even competing faults on the part of the contractor.

For federal contractors, it is not an exaggeration to say that performance evaluations are the lifeblood of the business.  A less-than-satisfactory evaluation in the Contractor Performance Assessment Reporting System (CPARS) affects far more than just the agency’s assessment of performance on a particular project.  A negative evaluation follows a contractor around – impacting the ability to obtain future contracts due to the specter negative past performance ratings.

The good news for contractors is that the ability to challenge and – if successful – reverse negative CPARS evaluations is a quickly developing area of government contracting law.

The first step in any successful CPARS challenge involves meaningful participation in the evaluation process.  The Federal Acquisition Regulation (FAR) Part 42.15 entitles contractors to submit comments and receive an agency review of a disputed performance evaluation.  Specifically, contractors are entitled to submit comments, rebuttal statements, and/or other information in response to the agency’s evaluation.  The agency must then review those comments at a level above the contracting officer and update the evaluation, if necessary.

If the review and comment process is unsuccessful in resolving the issues, both the U.S. Court of Federal Claims and Boards of Contract Appeals recognize that contractors may bring a lawsuit to address performance evaluation disputes.  Generally speaking, in order to advance a performance evaluation dispute to the next level, the contractor must be prepared to prove that the agency’s evaluation is arbitrary, capricious, and contrary to law.

Although litigation over a performance evaluation dispute is a relatively new development – the law is now clear that a condition precedent to litigating the issue before a Court or Board is a certified claim.  That is – just like a claim for damages based on (for example) delay or a differing site condition – the contractor must file a written claim in accordance with the Contract Disputes Act (CDA) and receive a denial or “deemed denial” of that claim in order to move forward.

In a recent decision, the Court of Federal Claims reinforced the notion that there is no substitute for a CDA claim.  The case originated with a complaint filed by a contractor concerning an allegedly unreasonable negative performance evaluation issued by the United States Transportation Command.  The contractor sought a declaratory judgment vacating the evaluation.

Before the contractor could even begin to prove its case, the government filed a motion to dismiss, arguing that the contractor did not submit a CDA claim to the contracting officer.  Without a claim (the government argued), the Court lacks jurisdiction to hear the case.  In response, the contractor asserted that it engaged in a series of communications with the agency regarding the CPARS evaluation, but the agency would not change its allegedly improper position.

On review, the Court sided with the government and dismissed the contractor’s complaint.  In this instance – far from proving a legitimate dispute that could substitute for a CDA claim – the Court relied on the contractor’s communications with the government as evidence its the lack of jurisdiction.  The Court held that the on-going nature of the parties’ negotiations showed that the contracting officer had no notice that the contractor sought a “final decision” of any kind.

The takeaway for contractors is very simple – engage in the process and follow the required steps when disputing a CPARS evaluation.  The contractor must participate in the review and comment procedure articulated in FAR 42.15 – but if that fails, the next logical step is to proceed with a CDA claim (or, perhaps as an intermediate step, a request for equitable adjustment).  Before a performance evaluation dispute can escalate to litigation, the contractor must be armed with a denial or deemed denial of that claim.

 

Contractors seeking to recover additional time and/or costs on government contracts typically choose to proceed with either a Request for Equitable Adjustment (REA) or a Claim.  These remedies fall under the general umbrella of the Disputes clause (FAR 52.233-1).

Often times, REAs and Claims can be a study in contrasts.  From a procedural perspective, submissions to the government are the subject of numerous technical hurdles that require strict compliance.  For example, a Claim must be “certified” by the contractor if it includes a demand for a sum certain in excess of $100,000.  The proper certification language is set forth at FAR 33.207(c).  An REA does not require a corresponding certification unless it submitted to an agency of the Department of Defense, in which case the certification found at DFARS 252.243-7002 is required.

On the other hand, resolving REAs and Claims often involves informal negotiations and compromises.  Contractors seeking to resolve disputes with the government are well served by remaining flexible and engaging in the kind of give-and-take usually reserved for the alternative dispute resolution universe.

In order to achieve maximum effectiveness in resolving disputes, government contractors need to be able to excel with a foot in both worlds – that is, maintaining compliance with the applicable rules and regulations while remaining open to outside-the-box solutions.  Straying too far in either direction can result in a negative outcome.

For example, a recent Armed Services Board of Contract Appeals (ASBCA) decision highlights the case of a contractor that failed to comply with some hard and fast rules during its settlement negotiations with the government.  As a result, the Board denied its appeal – leaving the contractor empty handed.

The appeal involved an Army contract for the operation of a solid waste burn pit in Afghanistan.  The government terminated the contract for convenience and directed the contractor to submit a settlement proposal.  In response, the contractor submitted a properly certified claim for $160,000 in costs on October 24, 2013.  Just four days later, the contracting officer issued a final decision denying the claim and informing the contractor of its right to appeal (90 days, if filing at the ASBCA).

Even after the contracting officer’s final decision, the parties continued to negotiate.  The contractor floated a comprehensive settlement agreement including all labor and leased equipment expenses.  The contracting officer responded that the government intended to deny the proposal due to a lack of supporting documentation, but also invited the contractor to supplement the proposal.  The contractor responded with a revised settlement proposal.  Critically, the contractor did not certify this revised submission, which was also later denied by the government.

About three years later, the contractor filed its Notice of Appeal from the government’s denials with the ASBCA.  The government promptly filed a motion seeking to dismiss the appeal as untimely because it was filed well beyond the 90 day deadline included in the contracting officer’s final decision.  The Board agreed and dismissed the claim.  Tangentially, the Board also commented that it lacks jurisdiction over the contractor’s revised proposal due to the lack of a proper certification.

This decision offers a variety of lessons for contractors pursuing or considering claims against the government.  First, the case highlights the substantial latitude for negotiations during the dispute resolution process.  While they did not bear fruit here, the government and the contractor exchanged multiple volleys with the opportunity to refine and supplement the original submission.  Contractors should endeavor to keep an open line of communication during the REA/Claim process and promptly respond to requests for supplemental information.

The case also provides contractors with some good examples of what not to do.  Here, the contractor failed to certify its claim and then made matters worse by waiting an unreasonable amount of time to pursue its appeal.  Most claim miscues can be corrected or at least mitigated if they are discovered early in the process.  However, in this case, the nearly three year delay was simply impossible to overcome.

The contractual duty of “good faith and fair dealing” is well established in private contracts.  Depending on your jurisdiction, there is very likely either a formal or an informal rule that parties to a contract must deal with each other honestly and in good faith.  This is (usually) not a written contract term – rather, the duty is implied automatically in order to reinforce the parties’ intent when entering into the agreement.

But, did you know that the same kind of duty exists in public contracts – and runs as a two-way street between contractors and the Federal government?  It is true.  And it can help your business in the pursuit of time or damages from the government as part of an REA or Claim.

Contract

Implicit in every government contract is the duty for the government to treat the contractor fairly and act in good faith.  Courts discussing this duty place both affirmative and negative obligations on the government.  In other words, the government (1) must take active steps to enable the contractor’s performance and (2) must not willfully or negligently interfere with said performance.

Allegations concerning a breach of the duty of good faith and fair dealing can arise in almost any contractual context.  For example, it is very common to see such claims in the context of delay and disruption claims.  The contractor seeks direction or guidance from the government on how to proceed with certain contract performance details – but the response from the government is delayed, unhelpful, or does not come at all.

A recent Court of Federal Claims decision also advises that contractors can proceed with fairly broad allegations concerning the government’s breach of good faith and fair dealing as part of an appeal.  Specifically, in response to a motion to dismiss by the government, the Court ruled that a such a claim does not need to be tied to a specific contractual obligation in order to demonstrate a violation.

The decision is a win for contractors because it recognizes that contract performance does not take place within a vacuum.  Even if there is no toehold to assert a breach tied to a specific obligation, the duty of good faith and fair dealing exists to ensure that the “reasonable expectations of the parties are respected” by both sides.

Contractors dealing with the government at almost any stage of contract performance would do well to give serious thought to the duty of good faith and fair dealing.  While it is a “big picture” concept, it can have very real implications when a dispute arises – including a meaningful impact on recoveries for claims and appeals.

Government contractors must be prepared to perform their Federal contracts – even in the face of a dispute with the government over essential contract terms.  Failing to perform can have devastating consequences, including default termination.

In a recent case before the Armed Services Board of Contract Appeals, the Board considered a U.S. Army Corps of Engineers’ contract for HVAC system upgrades.  After the contract was awarded, the contractor promptly raised concerns over the Agency’s design.  The Agency acknowledged the disagreement, but directed the contractor to complete the project as originally intended.

The dispute did not end there.

Rather than accept the government’s decision and complete the project, the contractor continued to lobby the Agency to consider a re-design.  The Agency again refused – and matters only got worse.  The Agency and the contractor repeatedly butted heads over seemingly simple issues, such as the format of project submittals.  Finally, after issuing multiple Notices to Cure and receiving no response from the contractor, the Agency cut bait default terminated the contractor.

The contractor appealed the determination, arguing that the problems on the project were all caused by the Agency’s design errors – as well as the Agency’s failure to acknowledge and resolve those errors.  These arguments did not persuade the Board and the appeal was denied.

The Board’s decision includes some fairly detailed analysis concerning the competency of the Agency’s decision making.  Was the design defective?  Did the Agency wrongfully refuse to consider the contractors proposed alternatives?  The Board answered all of these questions in the negative.

In my opinion, however, the far more important aspect of the Board’s decision stays out of these technical weeds.  The Board explained that the contractor’s failure to continue the work during the contract dispute justified the default termination.

While the Board hinted that the contractor’s failure to perform could have been deemed “excusable” under the right set of facts, that would not be my advice.  Experience shows that government contractors very rarely come out on the winning end of a dispute when they refuse to perform.

Consider the options:

  • On one hand, a contractor that performs during a dispute has a better chance of completing a job with a satisfied customer.  And any issues of excess costs or delays resulting from the dispute can be taken up as part of a claim or REA – so a contractor that continues to perform is not releasing the ability to recover later if the government really is responsible (just be sure to read that bilateral modification or final payment form before you sign it).
  • On the other hand, a contractor that refuses to perform knows that its work is not getting done and that its customer is unhappy.  While it may ultimately prevail, will that victory be worth the damaged relationship?

Against this backdrop, government contractors should also consider the power of the performance evaluation.  A contractor that works through a dispute is far more likely to get the passing marks (or even flying colors) that will help in future past performance evaluations.  Can the same be said for the refusing contractor?  Performance ratings matter – and they tend to stick with your business – particularly when a default termination is part of the equation.

Timing and circumstances matter.  Sometimes a conflict presents an obstacle to performance so great that it cannot be overcome.  My experience shows that should be the exception to the rule.  Whenever possible, government contractors should perform through a contract dispute and simultaneously position themselves to recover those costs/time later down the line.

Government contractors need to be conscious of the paperwork they sign on Federal contracts.  Signing a waiver or release of claims at any point during a project can result in a lost opportunity to recover damages – even if the event giving rise to those damages was already discussed in detail with the Contracting Officer.

In a recent post, we discussed the hazard associated with bilateral project modifications.  Even when a modification includes requested relief (like a time extension), it also likely includes broad waiver/release language that will apply to all pending claims.  A contractor should not sign a bilateral modification without a full and complete understanding of what claims (if any) are being surrendered with the stroke of a pen.

The same logic and advice applies to requests for final payment – and really any other document executed during the course of a Federal project.

In a case before the Postal Service Board of Contract Appeals, the contractor notified the Agency that it underestimated the paving area for the project – resulting in a significant labor and materials overrun.  The contractor informally requested that the Agency share in the associated costs, arguing that the government was aware of the estimating mistake prior to award.  The Contracting Officer disagreed with the contractor’s position and referred it to the contract’s disputes clause.

As the project approached the finish line, the contractor – who still intended to pursue a cost overrun damages claim – requested final payment on the contract.  In connection with that submission, the contractor executed a “Contractor’s Release.”  The Release expressly stated that the contractor released the Agency from any further claims, without exception.

After signing the Release, the contractor proceeded to pursue its cost overrun claim.  The Agency denied the claim in full, relying on the Release language.

On appeal, the Board sided with the Agency and likewise denied the claim for damages.  Notably, the Board rejected the contractor’s position that its conversations with the Contracting Officer were sufficient to preserve the claim (in other words, the Agency was indisputably on notice of the claim).  The express language of the Contractor’s Release trumped any equitable argument.

The lesson here for contractors is an easy one.  Read your paperwork and understand the consequences of a waiver/release before you sign it.  Broad releases are almost never in a contractor’s best interests, so develop a strategy in advance for preserving your right to recover what your company is lawfully owed on a contract.

One of the primary risks facing construction contractors is subsurface or unexpected physical conditions discovered after the work begins (commonly known as a Differing Site Condition).  When such conditions are encountered on a federal government project, contractors need to: (1) properly document the condition, (2) notify the government, and (3) preserve the right to bring a Request for Equitable Adjustment or Certified Claim.

Typically, any Differing Site Condition inquiry begins at Federal Acquisition Regulation 52.236-2.  The regulation defines a Type I differing site condition as a subsurface or latent physical condition at the site that differs materially from those indicated in the contract.  A Type II condition is defined as an unknown condition, unusual in nature, that differs materially from the conditions ordinarily encountered or typically expected of the work provided in the contract.

These definitions seem straightforward – either the conditions encountered align with the contract, or they do not.  However, contractors should not take documenting or proving Differing Site Conditions lightly.  There is still much room for disagreement.

One area where contractors and the government commonly diverge is whether the disputed site conditions were “reasonably foreseeable.”  That is, should the contractor have anticipated the conditions based on all of the information available to the contractor when it bid the project.

This particular issue was recently litigated before the Armed Services Board of Contract Appeals (ASBCA) in a dispute over an Army Aviation Support Facility construction contract.  In a nutshell, the contractor and the government disagreed about whether the soft, saturated soils encountered during excavation for the project constituted a Type I Differing Site Condition.

In discussing the issue of reasonable foreseeability, the Board specifically considered the government’s claim that the contractor had access to the site (during a pre-bid site visit) and, therefore, the ability to discover the condition.  The Board disagreed.  The site visit included a visual inspection only – no invasive investigation was permitted.  While Type I Differing Site Conditions do not literally need to be below ground, that made a difference in this case.

The ASBCA concluded that the contractor proved – by a preponderance of the evidence – that the soil conditions at the site were unsuitable for construction.  As a result, it awarded the contractor damages associated with the unexpected soil remediation costs.

Thinking specifically about Type I Differing Site Conditions, contractors should keep the following elements in mind:

  • Is the condition encountered materially different from that indicated in the contract?
  • Is the condition encountered reasonably unforeseeable based on the information provided by the government at the time of bidding
  • Did your firm reasonably interpret the contract and the related documents provided by the government? and
  • Did your firm incur actual damages due to the difference between the expected condition and the condition actually encountered?

If you can answer all of these questions in the affirmative, then your firm is likely entitled to an upward contract adjustment from the government.