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Board Rules Contractor Can Stop Work Due to Inadequate Funding

Posted on December 15th, 2014 by

In a recent decision issued last week pertaining to a 1 million square foot VA replacement Medical Center in Denver, the Civilian Board of Contract Appeals (“CBCA”) held that (1) the VA was responsible for providing a design that could be built for $582,840,000; (2) the VA “materially breached” the contract by failing to provide such a design; and (3) the contractor Kiewit-Tuner, a joint venture, was entitled to stop work. Kiewit-Turner, a Joint Venture v. VA; CBCA #3450 (December 9, 2014) The following findings supported the Board’s determination that the VA’s breach was “material” thus allowing the contractor to stop work:

  • The agency failed to provide a design that could be constructed within the estimated cost because it did not control its designer.
  • The VA paid no heed to value engineering suggestions for cost reductions made by Kiewit-Turner.
  • The agency delayed progress of construction, such as by delaying the processing of design changes and change orders.
  • Even though it was clear that the cost to build the project as designed would far exceed the contract price, the VA had no plans to seek additional funding.

The VA’s own project manager commented that the VA’s on-site team – project executive, senior resident engineer, resident engineers, contracting officer, and project coordinator for the medical center – lacked confidence in each other’s abilities and respect for each other’s actions and was “the most dysfunctional staff on any project that he had ever seen.”

The VA’s unfamiliarity with the contract vehicle also contributed to missteps in the contracting process. The contract was an “integrated design and construct contract,” referred to as an “IDc” contract. In this arrangement, the construction contractor is brought into a project early, to analyze the design and provide input in the design process. The process should result in changes to the design, or better estimates of cost.  This was not done, however.

All reasonable estimates were consistently greater than available funding. As part of an attempted resolution, the VA agreed to provide a revised design capable of construction at the original estimated cost of $582,840. The VA failed to produce such a design, and the Board’s decision seems to question whether the VA was capable of doing so. Indeed, the original construction contract drawings were only 80% complete, and the Board attributed failures to the “VA’s incomplete design, failure to process change orders from the spring of 2011 to the spring of 2012, failure to process supplemental instructions, and failure to make timely payment to the contractor.”

Delays, payment and suspension contributed to additional cost escalation in a classic vicious cycle. By fall 2012, prospective subcontractors and sureties were reluctant to participate because of payment issues. Firms that bid on subcontracts increased their prices to account for the risk. The prime contractor claimed to have sunk $20 million of its own money in the project. Accordingly, Keiwit-Turner requested to suspend performance and demanded that project management be handed over by the VA to the Corp. of Engineers.

Ultimately, the Board was persuaded that the VA did not have sufficient funds to pay for construction of the project as designed, could not provide a new design within the estimated cost, and had no plans to obtain adequate funding. At 62% complete, the project is now completely stalled and apparently mothballed on account of material breach of contract by the Department of Veterans Affairs.

While a contractor is normally required to continue to perform the contract despite disputes with the Government, this represents the rare exception. Because the VA fundamentally breached the contract, the Board held that the contractor was entitled to stop work. How and when the Denver project will be revived is uncertain at this point. Ultimately, any correction of the problem in Denver should address similar problems the VA periodically experiences funding changes on both major and minor construction projects historically.

 Kiewit-Turner, a Joint Venture v. VA; CBCA #3450 (December 9, 2014)


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