Inside this Issue

A1 - Government Contractor Entitled to Time Extension (but not Costs) Caused by Pandemic Delay to Project
A2 - Upcoming Webinar Provides Insights from Leading Construction General Counsel
A3 - Design Professional Contracts: 1 Minute Construction Risk Management Video Series
A4 - General Contractor Allowed to Bring Third Party Claim against Architect for Defective Specifications

Article 1

Government Contractor Entitled to Time Extension (but not Costs) Caused by Pandemic Delay to Project

A government contractor, pursuant to a fixed-priced contract with the U.S. Department of State, was constructing a rainwater capture and storage facility in Sierra Leone when the Ebola epidemic occurred in 2014. As a result, the contractor suspended its work, demobilized, sent its employees home, and put its construction materials into storage. When it later remobilized, the contractor paid for medical facilities and services onsite for the health and safety of its workforce. When it submitted a Request for Equitable Adjustment (“REA” or “change order”), the government granted a time extension but denied the request for $1.25 million for additional costs incurred. The Civilian Board of Contract Appeals affirmed this decision. Pernix Serka Joint Venture v. Department of State (20-1 BCA P 37589). The key holding was that the Delay clause in the contract specifically disallowed equitable compensation adjustment for an excusable delay based on epidemics.

The contract clause in question provides as follows:

“F.8.1 The Contractor will be allowed time, not money, for excusable delays as defined in FAR 52.249-10, Default (see Section/Paragraph I.153). Examples of such cases include (1) acts of God or of the public enemy; (2) acts of the United States Government in either its sovereign or contractual capacity; (3) acts of the government of the host country in its sovereign capacity; (4) acts of another contractor in the performance of a contract with the Government; (5) fires; (6) floods; (7) epidemics; (8) quarantine restrictions; (9) strikes; (10) freight embargoes; and (11) unusually severe weather.

F.8.2 In each instance, the failure to perform must be beyond the contract and without the fault or negligence of the Contractor, and the failure to perform furthermore (1) must be one that the Contractor could not have reasonably anticipated and taken adequate measures to protect against, (2) cannot be overcome by reasonable efforts to reschedule the work, and (3) directly and materially affects the date of final completion of the project.”

In this case, the contractor was concerned its personnel wouldn’t be safe with the Ebola virus spreading throughout the area, and that it wouldn’t be able to support its personnel if they needed to be evacuated. In seeking guidance from the contracting officer for “instructions on the way forward,” the contractor sought to avoid making a unilateral decision on what to do, but to instead obtain government direction and consensus on what action to take.

The Department of State declined to provide any direction or guidance as to whether the contractor should leave the jobsite. The contractor, feeling strongly that it couldn’t continue to have its personnel work under these conditions, decided to demobilize and shut down the project. It sent notice to the contracting officer of delay related to the crisis. The contractor then directed that all personnel be evacuated from the country.

In response to the notice letter, the contracting officer responded as follows:

“We are aware and acknowledge your concerns in your letter dated 08AUG2014 about the impact the Ebola Outbreak has towards continuing work on this project. Since you are taking this action unilaterally based on circumstances beyond the control of either contracting party, we perceive no basis upon which you could properly claim an equitable adjustment from the Government with respect to additional costs you may incur in connection with your decision to curtail work on this project.”

It is important to note that the contractor made a concerted effort to have the Government Issue direction to suspend the work rather than making a unilateral decision. When the Government refused to act, and the contractor decided on its own what to do, it complained to the contracting officer,

“We felt we were cornered to make a unilateral decision to save our people’s lives essentially, and it felt like it was a chicken game with the Government. They waited us out until we had to leave, and then immediately you get a response that says this is unilateral.”

In addition to the costs of evacuating its employees, the contractor incurred numerous costs, including the costs for temporary power and lighting at the construction site and it hired local security to maintain the generator. In response to the contractor’s REA seeking to recover additional costs, the contracting officer responded,

“PSJV [Contractor] may be entitled to a non-compensable time extension under the excusable delay clause if it can prove that performance of the contract was impossible .... If the [U.S. Government] agrees to the existence of excusable delay conditions, PSJV would be entitled to a time extension only, and not an equitable adjustment for delay costs or the other types of expenses included in PSJV’s [cost proposal].”

Ultimately, the government granted the contractor a time extension for 195 additional calendar days for the Ebola outbreak, but denied any additional compensation. Appeal from this decision was denied by the Board for the reasons set forth below.

Contractor Assumes the Risk in a Firm Fixed-Price Contract

The Board cites several case precedents for the proposition that, “it is well-established that a contractor with a fixed price contract assumes the risk of unexpected costs not attributable to the Government.”

“PSJV’s firm, fixed-price contract obligated PSJV to perform and receive only the fixed price. The contract, in clause F.8.1 and the referenced FAR clause 52.249-10, explicitly addresses how acts of God, epidemics, and quarantine restrictions are to be treated. A contractor is entitled to additional time but not additional costs. Appellant’s attempts to shift the risks clearly articulated by the contact are unavailing.

Particularly given the Excusable Delays clause, PSJV has not identified any clause in the contract that served to shift the risk to the Government for any costs incurred due to an unforeseen epidemic. Nor does the contract require the Government to provide PSJV with direction on how to respond to the Ebola outbreak. Thus, under a firm, fixed-price contract, PSJV must bear the additional costs of contract performance, even if PSJV did not contemplate those measures at the time it submitted its proposal or at contract award.”

No Cardinal Change to the contract

The contractor claimed it “was forced to perform in cardinal change conditions,” or “was constructively ordered to provide medical and life safety measures outside the scope of the contract,” or “incurred costs due to the breach of the government’s implied duty to cooperate.”

A cardinal change, as explained by the Board, is a breach of contract that occurs if the government effects a change in the contractor’s work “so drastic that it effectively requires the contractor to perform duties materially different from those found in the original contract.” In this case, the Board held that the contractor failed to establish a cardinal change and that,

“Despite the difficulties encountered during the Ebola outbreak, the Government never changed the description of work it expected from the contractor. Throughout communications with PSJV, the Government repeatedly stated that it would not give directions to the contractor on how it should respond to the ongoing outbreak, instead leaving the decisions solely in the hands of the contractor. Any changes in conditions surrounding performance of the contract arose from the Ebola outbreak and the host country’s reaction to the outbreak. This situation forced PSJV to reevaluate how it wished to proceed with the work outlined in the contract. Throughout the situation, DOS informed PSJV, on multiple occasions, that it would not order PSJV to evacuate the site and that PSJV must make its own business choices as to whether it needed to demobilize from the site.”

No Constructive Change

The contractor argued that the demobilization and remobilization of its personnel, and the additional site safety measures necessitated by the Ebola outbreak constitute constructive changes by the Government, entitling the contractor to an equitable adjustment for its increased costs. A constructive change occurs where a contractor performs work beyond the contract without a formal order either because of an informal order of the government or due to the fault of the government. To recover on a constructive change argument, a contractor must demonstrate that it performed work beyond the contract requirements -- either expressly or implicitly at the direction of the government. Unless an “alteration in the word to be performed” results from government action, there can be no finding of a construction change says the Board. Here, the Board states:

“PSJV acknowledges that DOS did not give it directions or orders to evacuate the project site. In effect, while PSJV concedes that the Government had no contractual obligation to provide direction, it continues to assert that the Government should have done so nonetheless. Simply put, PSJV fails to demonstrate a constructive change because no change to the contract occurred. PSJV remained obligated to perform throughout the performance period, and the Excusable Delay clause provided for additional time, but not additional money.”

For these reasons the Board denied the contractor’s appeal and thereby affirmed the decision of the government to deny equitable adjustment to cover the contractor’s additional costs.

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk Report, Vol. 22, No. 8 (Oct/Nov 2020).

Article 2

Upcoming Webinar Provides Insights from Leading Construction General Counsel

See similar articles: Upcoming Webinar

What if you had access to the insights of the top general counsel from five of the largest construction companies for 90 minutes and could get CE credit for it? The Chief Legal Officers from Hensel Phelps, Gilbane, Balfour Beatty, Burns and McDonald, and Big D Construction - will share their thoughts and experience in addressing the biggest legal issues and latest trends they face for this December 9^th webinar. Register now here. Our readers are being offered a 10% discount with the code BP10.

Moderated by AGC’s & ConsensusDocs’ Brian Perlberg, you will learn how these companies are adopting to the latest legal requirements and technological advances, such as drones, RFID tracing and social distancing. Hear new approaches to legal and risk management for such things as artificial intelligence (AI) for contract reviews as well as more basic common sense and tested approaches to increase efficiencies. The webinar addresses how the relationship between in-house counsel and outside counsel has changed and remained the same in light of COVID-19. Lastly, you will hear how some General Counsels’ roles have evolved into a hybrid construction executive role to facilitate a more holistic company-wide approach to risk management.

This is published in ConstructionRisk Report, Vol. 22, No. 8 (Oct/Nov 2020).
Copyright 2020, ConstructionRisk, LLC

Article 3

Design Professional Contracts: 1 Minute Construction Risk Management Video Series

Kent Holland created this series of short videos to provide risk management and contract drafting tips for design professional contracts. Each video is one to two minutes in length. At the conclusion of each video, the next one will start automatically. Or you can jump to a different clause of your choice.

Check it out here.

This is published in ConstructionRisk Report, Vol. 22, No. 8 (Oct/Nov 2020).
Copyright 2020, ConstructionRisk, LLC

Article 4

General Contractor Allowed to Bring Third Party Claim against Architect for Defective Specifications

Brasfield & Gorrie LLC (Brasfield) was a general contractor (GC) hired by Fritz Farm Retail Company, LLC to construct The Summit at Fritz Farm, a multi-use development. Brasfield entered into a subcontract with Harrod Concrete and Stone Co. (Harrod), for Harrod to furnish concrete for the development. Brasfield sued Harrod for alleged defects in the performance of the concrete it supplied. Harrod in turn filed a Third-Party Complaint against Nimrod Long & Associates, Inc. (Nimrod) who the court states “provided landscape architectural and design services for the Fritz Farm Project.” Unfortunately, the Court fails to state whether Nimrod was under contract to Brasfield (perhaps as a design-builder) or to the project owner under a design-bid-build project. This is an important distinction that should have been specified in order to understand the court decision.

The subcontractor made third-party claims against the architect for negligence, negligent misrepresentation, and common law indemnity. Specifically, Harrod alleged that “the specifications prepared by Nimrod were inferior and inadequate for the production of concrete to be utilized for exterior hardscape and other improvements of the Fritz Farm Project, among other reasons, because concrete is exposed to severe weather with freeze/thaw cycles in Kentucky.” The Architect filed a motion to dismiss the third-party claim based on lack of privity of contract. It basically argued that it had no contractual duty to the subcontractor, and the subcontractor was not entitled to any third-party beneficiary rights. This would also lead to argument that the “economic loss doctrine” prevented this claim for purely economic losses. In rejecting that argument, the court stated “Contrary to what Nimrod contends, an architect, such as Nimrod, may be found liable under a contractor’s claim for negligent misrepresentation in the absence of privity.” The court also stated, “In addition, the Kentucky Court of Appeals has expressly recognized that architects can be held liable by third parties for negligent misrepresentation by supplying faulty design plans and specifications.”

Therefore, concluded the court, “Nimrod owed a duty to Harrod separate from its contractual duties to Brasfield. Specifically, Harrod asserts that the designs prepared by Nimrod, which Harrod reasonably and foreseeably relied upon, were negligently prepared because the mix design specifications were inadequate. However, Nimrod represented to Brasfield and Harrod that they were suitable for use at the Fritz Farm Project.”

The architect also moved to dismiss the subcontractor’s common law indemnity claim. The court concluded that, “the present facts sufficiently allege a claim of common law indemnity against Nimrod. Harrod states that their claim for common law indemnity “concerns Nimrod’s preparation of faulty specifications that were inadequate for exterior hardscape at the Fritz Farm Project.” The court stated:

“According to the Complaint, Harrod alleges that if Harrod is to be held liable for delivering a product that did not meet Nimrod’s prescribed specifications, it is at the fault of Nimrod for failure to provide adequate design specifications for Kentucky’s climate and the project’s intended use. [Id.] Harrod is responsible for any defects in the performance of the concrete supplied to the Fritz Farm Project.”

Editor’s Comment: The above sentence makes no sense. The court seems to be buying the subcontractor’s argument that is excused from meeting the specifications because those specifications were allegedly defective. Under the well known Spearin doctrine, a contractor that meets the specifications is excused from liability in the event the project fails to perform as intended due to defects in those specifications. If the designs were prepared by the architect directly for either the project owner, the owner would have potential liability to the subcontractor for defective specifications under what is known as the Spearin doctrine, which creates a type of warranty of design as between the project owner and the contractor who relies on the specifications provided to the contractor by the owner. In contrast, if this was a design-build contract, the architect’s client would have been the GC in which case the GC would have made the Spearin doctrine warranty of design when it provided the specifications to its subcontractor, and the subcontractor would be able to make a claim directly against the GC for the allegedly defective specifications. To receive the benefit of the Spearin doctrine, a contractor must first meet the specifications even if they are defective.

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