By: Thad Schurter
COVID-19 has increased the costs of construction at every level of the industry. Supply chain delays, worker shortages, increased PPE requirements, project suspension, and the impacts of demobilization and remobilization have all conspired to create additional expense that was unanticipated at the contracting stage. Although a force majeure clause may create schedule relief or an avenue for avoiding liquidated damages, many contracts lack a corresponding cost recovery mechanism. As a result, some contractors are seeking recovery under theories of cardinal change[1] or constructive change.[2] However, a recent decision by the Civilian Board of Contract Appeals demonstrates how difficult it may be to successfully assert such claims and that recovery, if any, remains largely a function of contractual risk allocation.
In Pernix Serka Joint Venture v. Department of State, CBCA 5683 (Apr. 22, 2020), Pernix Serka was awarded a $10.8 million-dollar fixed price contract to construct a rainwater capture system in Freetown, Sierra Leone. The contract included an Excusable Delays provision that provided that the contractor would be allowed time, not money, for “excusable delays” which included acts of God, epidemics, and quarantine restrictions.
As the project approached 65% completion, an Ebola outbreak in the nearby Republic of Guinea spread to Freetown. The contractor became concerned about the potential spread of the virus and its ability to evacuate its personnel and sought guidance from the Department of State (“State Department”) on how to respond. After being told it would need to make its own decisions about how to complete the project under such conditions, the contractor elected to evacuate its personnel and demobilize until the outbreak was contained.
In response, and despite a declaration from the World Health Organization that the outbreak was an international public health emergency, the State Department informed the contractor that it viewed the decision to demobilize as a unilateral one and that it perceived no basis upon which the contractor could properly claim an equitable adjustment with regard to additional costs incurred in connection with its decision.
The contractor resumed work and submitted a revised project schedule that shifted the substantial completion date back by several months. It also submitted two requests for equitable adjustments to the contract sum to recover the costs it incurred to demobilize and remobilize to the project site including the costs of contracting for appropriate medical facilities and other Ebola-related health and safety provisions.
The State Department granted the contractor’s claim for schedule relief under the excusable delay clause, but rejected its requests for additional Ebola related compensation. In response, the contractor filed a certified claim with the Civilian Board of Contract Appeals[3] seeking over $1.2 million dollars for the additional life safety and health costs it incurred due to alleged differing site conditions, disruptions of work, and for costs incurred to demobilize and remobilize at the work site.
The contractor asserted that the additional work to protect its personnel from the Ebola outbreak constituted either a cardinal change or a constructive change to the contract that entitled it to additional compensation. The State Department responded that because the parties’ contract was a fixed price contract, the contractor assumed the risk of any unexpected costs that were not attributable to the government.
The Board agreed with the State Department and rejected the contractor’s claims citing the absence of any specific contractual provision that shifted the risk to the government for any costs incurred due to an unforeseen epidemic. The Board also noted that the contractor had failed to demonstrate a cardinal change existed because the State Department never changed the description of work it expected from the contractor. The additional life safety measures after remobilization did not alter the nature of the work which the contractor remained obligated to perform at the fixed price previously agreed upon by the parties.
The Board also rejected the contractor’s argument that the work it performed to demobilize and remobilize from the site and the additional safety measures it undertook upon its return should be considered constructive changes made by the government which entitled it to an equitable adjustment for the increased costs. The Board reasoned that the State Department had not ordered the contractor to undertake any specific measures in response to the outbreak and therefore no change had occurred.
TAKEAWAYS
Although the holding in Pernix Serka was limited by several case-specific factors, there are still helpful takeaways for contractors on public and private projects alike.
First, the Board’s decision on the claims for a cardinal or constructive change may have been different if the contractor had obtained specific direction from the State Department or local authorities regarding the required implementation of safety measures. In today’s COVID-19 world, authorities at the local, state, and federal levels have issued guidance and directives on safety precautions and social distancing that have impacted productivity and increased costs. Obtaining clear direction concerning required safety measures, including those that may be more stringent than what is required by the contract documents, will demonstrate that such measures are not undertaken voluntarily and potentially open the door for recovery due to a cardinal or constructive change.
Second, the importance of a well-defined force-majeure clause cannot be understated. Without the term pandemic in the excusable delay clause, the contractor may have faced significant liquidated damages for delays associated with demobilization and remobilization. It is equally important to understand what other provisions may impact your right to recovery.
Finally, documentation remains critical to the success of any construction claim. All aspects of a COVID-19 related claim must be documented, and not just those evidencing costs. Communication with owners, contracting officers, local and state officials pertaining to additional required health and safety measures should be documented and maintained for potential use in support of a claim.
If you have questions about asserting a claim or compliance with the notice provisions of your construction or design contract, contact your DSV attorney or Thad Schurter at tschurter@dsvlaw.com
[1] The term “cardinal change” is used in federal contracting to describe what occurs “when the government effects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.” Allied Materials & Equip. Co. v. United States, 569 F.2d 562, 563–64 (Ct. Cl. 1978).
[2]A constructive change occurs in federal contracting when the government expressly or impliedly orders a contractor to perform work that is not specified in the contract documents. In that event, the contractor is entitled to additional compensation, an equitable adjustment in contract price, for constructive changes. Clearwater Constructors, Inc., v. U.S., 71 Fed. Cl. 25, 28 (2006).
[3] The Civilian Board of Contract Appeals is an independent tribunal within the General Services Administration that presides over disputes involving Federal executive branch agencies. Its primary responsibility is to resolve contract disputes between government contractors and agencies under the Contract Disputes Act.
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