Government Contract Attorneys, SDVOSB Law: Government Contracts Attorneys | Lawyers

Board Upholds Termination for Default

Posted on March 27th, 2015 by

In RAK Contractors v. Department of Agriculture, CBCA No. 4011 (March 19, 2015), the Civilian Board of Contract Appeals upheld the Government’s termination for default.  The contractor argued that the termination for default was improper because: (1) it could not obtain necessary financing for reasons beyond its control, and (2) it made a mistake in its bid.

The Civilian Board of Contract Appeals held that to prevail in a mistake in bid claim after award the contractor must prove that:

  1. a mistake occurred;
  2. the mistake was a clear-cut clerical or mathematical error or misreading of the specifications and not a judgment error;
  3. prior to award the agency knew or should have known that a mistake had been made;
  4. an agency request for bid verification was inadequate; and
  5. proof of the intended proposal was established.

The contractor could not prove each of the above elements, which led the Board to conclude that the contractor made an error in judgment and underestimated its costs of performance.

As to financial stress, the Board held that this is not an excuse for performance, stating that.

A contractor is expected to have the financial resources to perform a contract.
Nothing in the contract promised or suggested that the agency would pay for equipment
before it was ordered or delivered. Case law makes clear that insufficient finances do not
constitute a basis beyond the contractor’s control. A lack of working capital is not an excuse
for non-performance of a contract when the Government does not contribute to the financial
problem of the contractor. A contractor is expected to have the financial ability to perform
the contract. A default is not excused by a contractor’s inability to secure financing

The contractor could not prove that the Government caused its financial downfall.  As such, the Board held that the termination for default was proper.

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)

Contractor’s Duty to Proceed

Posted on May 17th, 2014 by

Oftentimes, the Government will demand that a Contractor continue performance even though the Contractor disagrees for whatever reason. The disputes clause requires the contractor to continue performance despite this dispute. Referred to as the “Duty to Proceed,” this duty is based on the contract’s disputes clause which states that “the Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the contracting officer.” This duty to proceed ensures that work does not stop while differences between the parties are resolved.

When faced with a disagreement over whether a change exists, for example, the contractor should continue performance and file a claim for an equitable adjustment with the contracting officer. Meanwhile, the contractor should keep good records of the additional work (labor and material), as well as the time to perform this additional work. Hopefully, the contractor can afford to pay for the additional work while it seeks relief under the contract dispute procedures.

There are three exceptions to the Duty to Proceed recognized by the boards and courts:

• The specifications are so defective that performance cannot continue without assured failure;
• The contractor cannot proceed until it receives a response to a clarification request; and
• The Government materially breached the contract, i.e. cardinal change.

The defective specification exception requires a showing that the specifications are so defective that the purpose of contract is guaranteed to fail and the Government knows this. Absent clear direction from the Government to perform despite inevitable failure, the contractor can stop work. In Seven Sciences, Inc., ASBCA No. 21079, 77-2 BCA P12,730, the Board held that a contractor was allowed to stop work because it would have produced a “useless” product:

We agree with the Government that, short of commercial impossibility, a contractor is not entitled to refuse performance on the ground that performance would entail substantial additional expense not taken into account in its bid price. However, in the present case, appellant acted reasonably in refusing to perform. As established in our findings, even if appellant had been able to obtain sufficient information to proceed with procurement of parts, fabrication of battery chargers in accordance with the Government’s defective design, without original stable base drawings, would likely have resulted in failure. Absent clear Government direction to proceed with the manufacture of useless chargers, appellant was not obliged to do so. The consequences of the Government’s breach were so severe as to provide appellant with the right of avoidance.

The clarification exception to the duty to proceed exists if the Contractor cannot move forward with performance without an answer to an RFI or clarification request and the Government fails to provide an adequate response. See, Appeal of James W. Sprayberry Constr., 87-1 B.C.A. (CCH) P19,645, where the contractor was excused from performance because the Government did not answer clarification about slope of roof.

The breach of contract exception to the duty to proceed under the cardinal change theory requires proof that the Government has fundamentally changed the purpose or scope of the contract. While there is no formula for determining whether a cardinal change has occurred, the courts have considered the following factors: (i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.

Anyone considering stopping work should think twice. The duty to proceed generally requires the contractor to continue performance. The exceptions to this rule are rare. Make sure you have done everything possible to continue performance and seek legal advice before taking the drastic action of stopping work.

 

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