The Construction Contract Review

Got Conflicting Information in Bidding Documents? How to Avoid a Differing Site Condition Dispute.

A contractor was hired to remove DDT from contaminated soil at a Navy facility in California.  One of its subcontractors claimed that the soil encountered onsite had a higher than expected clay content resulting in extra costs incurred. The contractor sued to recover these unexpected costs on behalf of the subcontractor claiming the sub relied on one of two bidding documents relating to soil content in preparing its bid.  There was no specific differing site conditions clause in the contract, so the contractor’s theory was one of misrepresentation of the site conditions by incorrectly representing the amount of clay in the contaminated soil. 

 

In order to prevail on such a site conditions claim, a contractor must establish four elements.

1. The contractor must prove that a reasonable contractor reading the contract documents as a whole would interpret them as making a representation as to the site conditions - that the contract contained some identification of the conditions to be encountered at the site;
2. The contractor must prove that the actual site conditions were not reasonably foreseeable to the contractor, i.e., that the contractor "reasonably relied" on the representations given all information available to the contractor when bidding;
3. The contractor must prove that it in fact relied on the contractual representation; and
4. The contractor must prove that the conditions differed materially from those represented and that the contractor suffered damages as a result. 

The Court rejected the claim because it did not find the contractor proved that the specific contract documents actually represented site conditions, failing to satisfy the first requirement above.  But moreover, the contractor failed to prove the second requirement because the Court determined that the contractor’s reliance on the soil information was not reasonable.  Two bidding documents containing information on soil content were in “direct contradiction,” and the contractor could not claim a reasonable reliance on one but not the other. 

 

With 20/20 Hindsight….

 

This claim was lost at the time the bid was submitted.  Testimony emerged at the trial that the contractor itself questioned some of the data.  The classic “should have been a warning” was used by the Court in describing what conflicting reports represented to a “reasonable contractor.” 

 

Obviously, the contractor made a determination based on the data that turned out to be wrong.  However, given the importance of the soil characteristics to the success of the treatment methodology employed, the contractor could have negotiated better contractual protections in its contract.  The importance of the soil condition and the technical assumptions made should have been incorporated into the construction contract.  At a minimum, the contractor should have identified the contradiction and explained its reliance on one document over the other in its bid.  20/20 hindsight is pretty easy. 

 

The Construction Contract Clock:

Work Order to Court decision: 10 years

 

The case is known as Int'l Tech. Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008)

4 Things You Must Show If Claiming a Constructive Change

A constructive change occurs where a contractor performs work beyond the contract requirements without a formal order, either by an informal order or due to the fault of the Government.   Equitable adjustments are corrective measures that make a contractor whole when the government modifies a contract.  A contractor is entitled to an equitable adjustment for a constructive change when it is required to perform more or different work not called for under the terms of its contract.

 

Several categories of constructive change have been identified in existing case law:

• disputes over contract interpretation during performance;
• government interference or failure to cooperate;
• defective specifications;
• misrepresentation and nondisclosure of superior knowledge; and
• acceleration.

 

The doctrine of constructive change serves to

(1) remediate contractor claims for extra work, and (2) permit contractors to perform disputed work without having to risk abandonment of their contracts to preserve their claims. The theory underlying the constructive change concept is that where the government "should have" issued a change order authorizing the extra work in the first place, the court or board [of contract appeals] may direct the government to do what "should have been done" by directing the government to issue a formal change order. The doctrine in its modern guise is the embodiment of the ancient principle that "what should have been done will be done."

Philip L. Bruner & Patrick J. O'Connor, Jr., Bruner and O'Connor on Construction Law § 4.25 (2002) as quoted in Metric Constr. Co., Inc. v. United States, 80 Fed. Cl. 178 (2008). 

 

In order to recover for a constructive change, a contractor typically must show:

1. The work performed was not included in the original scope of work
2. All contractual or statutory notice requirements were satisfied
3. The owner required the change and was not volunteered by the Contractor
4. Contractor tracked its additional costs incurred due to the change

A constructive change situation can sneak up on a contractor or an owner.  All four of these elements are usually required to be shown in order for a contractor to recover.  Therefore, be sure to contact an attorney early in the project if you are working without a formal change order.

Or even better, send us your contract before you submit your bid and we can provide a comprehensive attorney review, highlighting the risks to you and suggest some negotiating strategies.  Click here for more details.

2 Great Books If You Enjoy Construction

I’m starting to get asked what I would like to receive for the holidays.  As a construction attorney, I cannot say that a lot of my work reading is done for pleasure.  However, these two books made it on to my reading list and were thoroughly enjoyable.  If you enjoy construction issues like I do (and if you don’t, you probably should not be reading a blog called “The Construction Contract Review” - really, what are you doing here?), you will probably enjoy these books.  Drop a hint at the Thanksgiving Day dinner and see if one of these ends up in your stocking. 

 

I am not a professional book reviewer, and I’ve never played one on TV.  Accordingly, I will simply refer to the blurbs from Amazon.com, and no, I will not get any referral or commission from the sale of these books. 

The Path Between the Seas: The Creation of the Panama Canal, 1870-1914 by David McCullough. 

I just saw this news story, and was reminded how much I enjoyed this related book:  Construction of a new set of locks for the Panama Canal will begin in January.  According to the Amazon.com review: “The story of the Panama Canal is complex, full of heroes, villains, and victims. McCullough's long, richly detailed, and eminently literate book pays homage to an immense undertaking.” 

 

I found this book absolutely fascinating.  In a history class, one learns about the events, whereas in this book, McCullough tells about the personalities around the events.  He tells a great story.  If you’ve read any of his other books, you’ll probably enjoy this one. 

The Pentagon: A History, by Steve Vogel

When the Washington Post reviewed this book, they stated: “The Pentagon was built upon a foundation of lies, secrecy and cost overruns.”  Publishers’ Weekly stated: “Vogel traces the politics and design considerations involved in planning a new home for the previously scattered War Department … in the early 1940s. Wartime conservation subsequently forced builders to use the least amount of steel possible, and much concrete. The Stripped Classical building - erected in 16 months at a cost of $85 million - was made with five sides chiefly because it lay on remnant acres between five appropriately angled roads. At the time, it was a massive undertaking: five concentric rings of offices, 17.5 miles of corridors and a five-acre central courtyard.”

 

Like McCullough’s book above, Vogel does an excellent job of telling the story of the characters in this event.  Booklist recounted: “Vivid portraits are drawn of other key figures in the drama, among them Franklin D. Roosevelt, the president who fancied himself an architect; Secretary of War Henry L. Stimson and Army Chief of Staff General George C. Marshall, both desperate for a home for the War Department as the country prepared for battle; Colonel Leslie R. Groves, the ruthless force of nature who oversaw the Pentagon’s construction (as well as the Manhattan Project to create an atomic bomb); and John McShain, the charming and dapper builder who used his relationship with FDR to help land himself the contract for the biggest office building in the world.”  Anyone ever involved in a change order should read this book!

 

I wasn’t alone in enjoying both of these books, apparently.  The Kirkus Reviews wrote about The Pentagon: A History: "Among books dealing with seemingly impossible engineering feats, this easily ranks with David McCullough’s The Great Bridge and The Path Between the Seas, as well as Ross King’s Brunelleschi’s Dome." 

I have not yet read The Great Bridge or the Ross King book.  Hint, Hint.

Just Get the Construction Bond

I’ve done a lot of legal work for environmental remediation companies and others doing underground construction so I am always interested in court decisions that arise from those sorts of disputes.  A recent case in Massachusetts (but applying Louisiana law) provided a painful lesson for a subcontractor. 

 

Project Dispute

A Property Owner hired a General to perform environmental remediation, including the excavation and removal of contaminated soil, on real property in Massachusetts. General entered a written subcontract with Sub, wherein Sub agreed to supply a bond, labor, equipment, and materials to General for the environmental remediation over the course of about 90 days.  In return, General agreed to pay Sub $2,136,194.

 

About nine months after the originally scheduled completion date, General issued a cure notice and subsequently terminated Sub. 

 

Cross Claims

In letters written back and forth around the time of termination and, ultimately, in the ensuing litigation, General asserted that Sub breached “its subcontract in that it has failed to prosecute the work with diligence so as to ensure completion of the project in accordance with the Schedule." Additional alleged breaches included Sub's failures to: comply with the performance requirements of the Subcontract, meet the Subcontract deadline, submit a revised schedule that included a new completion date, and provide the bonds.

 

As with most cases like this, Sub presented an alternative point of view.  Sub disagreed with the termination and claimed that “site conditions, defective specifications, and schedule impacts/business interruptions, not [Sub], have delayed the project schedule."

 

Each party filed Summary Judgment motions against the other (in other words, “even assuming the other side’s version of events is correct, or based on facts that we agree on, I should still win because…”). 

 

What the Court Did

There were numerous parties involved in this litigation – in addition to the General and Sub, parties included the property owners, replacement contractors, sub-subcontractors, and equipment suppliers.  The main dispute, however, is simply between the General and the Sub. 

 

There were lots of intricate details as to why the project was unsuccessful.  There were sufficient disputes between Sub and General about what occurred (defective plans or ineffective implementation of plans?) such that the court said it couldn’t rule without more information.  The Court simply skipped the messy “he said/she said.” 

 

However, what was not in dispute was that the Sub never provided the contractually required performance bond.  The Court held that in construction contracts, the "failure to furnish and maintain payment and performance bonds or insurance specified by the contract documents is deemed invariably to constitute a material breach of the contract."  A material breach is one that "goes to the heart of the contract" and this breach was material because "[b]onds and insurance constitute significant instruments of risk allocation that, if not procured or maintained in force, materially shift to the owner the risk of nonperformance."  Due to this material breach by the Sub, General was justified in terminating the contract. 

 

Essentially, Sub never got the chance to prove it’s version of events because Sub never got the bond it was supposed to.  Ouch for Sub. 

 

The Construction Contract Court Clock

Contract to Decision: 3 years 2 months

Follow the Change Order Path

An unpublished opinion from a federal court in Virginia this spring provides a nice lesson in the importance of contractual change order procedures in construction agreements.

 

It stated: The Virginia Supreme Court has held that "when one furnishes labor to another under a contract which, for reasons not prejudicial to the former, is void and of no effect, he may recover the value of his services on a quantum meruit." Marine Dev't Corp. v. Rodak, 225 Va. 137, 300 S.E.2d 763, 765 (Va. 1983) (quoting Hendrickson v. Meredith, 161 Va. 193, 170 S.E. 602, 604 (1933)). "It is a general rule of law that he who gains the labor of another must make reasonable compensation for the same." Id. (punctuation and citation omitted). However, the Virginia Supreme Court has also held that "where there is an express and enforceable contract in existence which governs the rights of the parties, the law will not imply a contract in contravention thereof." Royer v. Bd. of County Supervisors of Albemarle County, 176 Va. 268, 10 S.E.2d 876, 881 (Va. 1940).

 

There you go, thanks for stopping by today. 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ok.  I’ll try to provide a little insight.  An electrical contractor was doing a project for a public entity.  The contractor wanted some change orders for some extra work.  The construction agreement had specific procedures to follow for requesting and receiving change orders.  The contractor followed those procedures….for awhile.  At some point, the contractor stopped following those procedures for additional extra work it did and tried to get paid.  The owner refused to pay for the extra work and then the contractor sued to recover the value of that work as being outside of the construction contract.  But the court found that the contractor failed to follow the prescribed method outlined in the parties' contract to obtain approval and payment for extra work -- a method with which it was not only familiar, but which it had in fact utilized.

 

Do you always know and understand the terms and conditions and the procedures of your construction contract for getting change orders approved? If your construction agreement has a path to follow for change orders, follow it, particularly if you’ve already started down that path once before. 

 

Click here for a nice summary and copy of the decision.

 

The Construction Contract Court Clock

Contract to Decision: 5 years 9 months