Construction Contract Claims, Changes, and Dispute Resolution [3 ed.] 0784414297, 9780784414293

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Construction Contract Claims, Changes, and Dispute Resolution Third Edition Edited by Paul Levin Foreword by Islam H. El-adaway, Ph.D.

Construction Contract Claims, Changes, and Dispute Resolution

Other Titles of Interest Interpreting Construction Contracts: Fundamental Principles for Contractors, Project Managers, and Contract Administrators, by H. Randolph Thomas, Ph.D., P.E.; and Ralph D. Ellis, Ph.D., P.E. (ASCE Press, 2008). Discusses the most troublesome contract clauses and presents rules to construe them so as to avoid disputes that must be resolved in court. Managing Gigaprojects: Advice from Those Who’ve Been There, Done That, edited by Patricia D. Galloway, Ph.D., P.E.; Kris R. Nielsen, Ph.D., J.D.; and Jack L. Dignum. (ASCE Press, 2012). A stellar group of financial, legal, and construction professionals share lessons learned and best practices developed from working on the world’s biggest infrastructure construction projects. Preparing for Design-Build Projects: A Primer for Owners, Engineers, and Contractors, by Douglas D. Gransberg, P.E.; James E. Koch, P.E.; and Keith R. Molenaar, P.E. (ASCE Press, 2006). Covers the basics of developing design-build requests for qualification and requests for proposals. Productivity Improvement for Construction and Engineering: Implementing Programs that Save Money and Time, by J.K. Yates, Ph.D. (ASCE Press, 2014). Focuses on investigation and analysis techniques that engineering and construction firms can use to support the implementation of productivity improvement programs. Project Administration for Design-Build Contracts: A Primer for Owners, Engineers, and Contractors, by James E. Koch, Ph.D., P.E.; Douglas D. Gransberg, Ph.D., P.E.; and Keith R. Molenaar, Ph.D. (ASCE Press, 2010). Explains the basics of administering a design-build project after the contract has been awarded. Public-Private Partnerships: Case Studies on Infrastructure Development, by Sidney M. Levy. (ASCE Press, 2011). Demystifies public-private partnerships as an innovative solution to the challenges of designing, financing, building, and operating major infrastructure projects.

Construction Contract Claims, Changes, and Dispute Resolution Third Edition

EDITED

BY

PAUL LEVIN, PSP

Library of Congress Cataloging-in-Publication Data Names: Levin, Paul, 1946- editor. Title: Construction contract claims, changes, and dispute resolution/edited by Paul Levin; forword by Islam H. El-Adaway, PH.D. Description: Third edition.|Reston, Virginia: American Society of Civil Engineers, 2016. Identifiers: LCCN 2015039204 (print)|LCCN 2015040371 (ebook)|ISBN 9780784414293 (print : alk. paper)|ISBN 9780784479698 (ebook)|ISBN 9780784479704 (epub)|ISBN 9780784479698 (pdf) Subjects: LCSH: Construction contracts—United States. | Dispute resolution (Law)—United States. Classification: LCC KF902.C65 2016 (print)|LCC KF902 (ebook)|DDC 692/.8—dc23 LC record available at http://lccn.loc.gov/2015039204 Published by American Society of Civil Engineers 1801 Alexander Bell Drive Reston, Virginia 20191-4382 www.asce.org/bookstore | ascelibrary.org Any statements expressed in these materials are those of the individual authors and do not necessarily represent the views of ASCE, which takes no responsibility for any statement made herein. No reference made in this publication to any specific method, product, process, or service constitutes or implies an endorsement, recommendation, or warranty thereof by ASCE. The materials are for general information only and do not represent a standard of ASCE, nor are they intended as a reference in purchase specifications, contracts, regulations, statutes, or any other legal document. ASCE makes no representation or warranty of any kind, whether express or implied, concerning the accuracy, completeness, suitability, or utility of any information, apparatus, product, or process discussed in this publication, and assumes no liability therefor. The information contained in these materials should not be used without first securing competent advice with respect to its suitability for any general or specific application. Anyone utilizing such information assumes all liability arising from such use, including but not limited to infringement of any patent or patents. ASCE and American Society of Civil Engineers—Registered in U.S. Patent and Trademark Office. Photocopies and permissions. Permission to photocopy or reproduce material from ASCE publications can be requested by sending an e-mail to [email protected] or by locating a title in the ASCE Library (http://ascelibrary.org) and using the “Permissions” link. Errata: Errata, if any, can be found at http://dx.doi.org/10.1061/9780784414293 Copyright © 2016 by the American Society of Civil Engineers. All Rights Reserved. ISBN 978-0-7844-1429-3 (print) ISBN 978-0-7844-7969-8 (PDF) ISBN 978-0-7844-7970-4 (EPUB) Manufactured in the United States of America. 23 22 21 20 19 18 17 16

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Contents

Foreword xiii Preface xv Acknowledgment xvii Contributors xix Chapter 1.

Introduction ............................................................................1 Paul Levin 1.1.

A More Rounded Approach to Construction Disputes 1 1.2. Construction Claims—Background, Outlook, and Approach 1 1.3. Definition of a Claim 3 1.4. The Purpose of This Book 3 1.5. Public Contracts 4 1.6. Private Contracts 4 1.7. Beyond the Contract—Principles of Construction Law 5 1.8. Policies and Procedures for Administration 6 1.9. New Format for the Third Edition 8 1.10. Review of Chapters 8 1.11. Owners, Designers, and Their Representatives 11 Endnotes 11

Chapter 2.

Claim Identification and Notification.............................. 13 Joseph A. McManus Jr. and Karlee Starr Blank 2.1. 2.2. 2.3. 2.4.

Definition of a Claim 13 Claims Consciousness 14 Two Elements of Every Claim 14 Identification and Entitlement 15 v

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2.5. 2.6. 2.7. 2.8. 2.9.

The Quantum Element of a Claim 21 Notification of Claims and Change Orders 22 Time Requirements 23 Late Notice 26 Notification—Factors Involving Contract Owners 27 2.10. Federal Contracts and the Contract Disputes Act 28 2.11. Appeal of a BCA or COFC Decision to the United States Court of Appeals for the Federal Circuit 39 2.12. Alternative Dispute Resolution and Federal Construction Contracts 40 2.13. Conclusion 40 Appendix 2A: EJCDC C-700 Standard General Conditions of the Construction Contract, Articles 11 and 12 41 Appendix 2B: Appealing the CO’s Final Decision to the Agency Board of Contract Appeals 48 Appendix 2C: Appealing the CO’s Final Decision to the Court of Federal Claims 51 Appendix 2D: Appealing a BCA Decision or Court of Federal Claims Judgment to the Federal Circuit 52 Appendix 2E: Alternative Dispute Resolution in the Boards of Contract Appeals, Court of Federal Claims, and Federal Circuit Court 54 Endnotes 61 Chapter 3.

Differing Site Conditions .................................................. 69 Marilyn Klinger 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. 3.8.

Introduction 69 Differing Site Conditions Clauses 70 Two Types of Differing Site Conditions 71 Type One Conditions—Examples 73 Type Two Conditions—Examples 76 Forces of Nature 77 Investigation of the Site and the Plans and Specifications 77 Summary and Checklist 83

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Appendix 3A: Site Investigation Report Form 85 Endnotes 87 Chapter 4.

Interpretation and Requirements of Contract Specifications ........................................................................ 91 Brian W. Bennett and Jonathan M. Blocker 4.1. Introduction 91 4.2. Rules of Contract Interpretation 92 4.3. Defective Specifications 98 4.4. Duty to Seek Clarification 103 4.5. Duty to Inform 106 4.6. Duty to Proceed 107 4.7. Duty to Inspect 108 4.8. Conclusion 110 Endnotes 111

Chapter 5.

Construction Project Delays and Time Extensions .... 117 Thomas D. Fertitta, Anthony L. Nedinsky, and Jeffrey G. Gilmore 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. 5.8. 5.9. 5.10. 5.11. 5.12. 5.13. 5.14. 5.15. 5.16. 5.17.

Introduction 117 The Critical Path and Float 117 Types of Delay 118 When Does a Delay Occur? 121 Causes of Delay 121 Suspension of Work 124 Disruption, Inefficiencies, Loss of Productivity, and Loss of Learning Curve 124 Delays Due to Defective Work Leading to Rework Delays 125 Typical Owner-Caused Delay 126 Typical Contractor-Caused Delay 126 Delays on Multiprime Contracts 127 Concurrent Delay 127 Pacing Delays 129 Delay Documentation, Measurement, and Proof 129 Liquidated Damages 132 No Damages for Delay Clause 133 Remedies for Project Delay 134

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5.18. Conclusion 134 Endnotes 135 Chapter 6.

Acceleration and Mitigation of Project Delays .......... 139 Christopher M. Burke and Michael J. Harris 6.1. 6.2. 6.3. 6.4.

Introduction 139 Mitigation 139 Acceleration 142 Proving Delays, Time Extensions, and Acceleration 146 6.5. Recovery Schedules and Schedule Acceleration 147 6.6. Acceleration Costs 148 6.7. Conclusion 149 Appendix 6A: Overtime Statistics 150 Endnotes 152

Chapter 7.

Records and Documentation .......................................... 153 Robert M. Freas and W. Wesley Grover III 7.1. 7.2. 7.3. 7.4. 7.5. 7.6. 7.7. 7.8. 7.9. 7.10.

Introduction 153 Types of Records 154 Bid, Estimate, and Budgets 154 Time Cards 155 Job Cost Accounting System 155 Production Reporting 157 Material and Delivery Receipts 158 Schedules and Progress Reporting 158 Cash Flows 159 Correspondence, Transmittal, and Submittal Logs 159 7.11. Daily Reports 160 7.12. Photographs and Videos 162 7.13. Special Forms for Change Orders and Claims 163 7.14. Periodic Reviews 165 7.15. E-Mail and Social Media 166 7.16. Document Management 167 7.17. Conclusion 167 Appendix 7A: Daily Production Report Form (Sample Form) 168

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Appendix 7B: Job Report Summary of Effect of Disruptions and Interference (Sample Form) 169 Appendix 7C: Change Order Initiation Form 170 Appendix 7D: Change Order Status Report (Sample Form) 172 Appendix 7E: Change Order Status Report Cover Letter 173 Endnotes 174 Chapter 8.

Use of Project Schedules and the Critical Path Method in Claims .................................................... 175 John C. Livengood 8.1. 8.2. 8.3. 8.4. 8.5. 8.6. 8.7. 8.8. 8.9.

Introduction 175 Use of CPM in Claims Analysis 179 Pitfalls to Avoid in CPM Claims Analysis 180 Development of the Baseline 182 Float 184 Float—Early Completion 184 Concurrent Delay 186 Three Types of Acceleration 188 Schedule Analysis Techniques for Claims Support 189 8.10. Contemporaneous Understanding of Criticality 194 8.11. Comparison Chart of CPM Analysis Methods 195 8.12. Other Methods 195 8.13. Expert Schedule Analysis 195 8.14. Conclusion 197 Endnotes 197

Chapter 9.

Impact on Labor Productivity from Claims and Change Orders ............................................ 201 William Ibbs and Paul L. Stynchcomb 9.1. 9.2. 9.3. 9.4. 9.5.

Introduction 201 Productivity’s Nature and Importance 203 Change and Productivity Loss 204 Loss of Productivity Change Requests and Claims 211 Ways to Improve Productivity 232

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9.6. Conclusion 233 References 233 Endnotes 238 Chapter 10. Subcontractors and Suppliers ........................................ 243 Christopher M. Anzidei 10.1. 10.2. 10.3. 10.4. 10.5. 10.6.

Introduction 243 General Contractor’s Duty of Performance 244 Contractor–Subcontractor Relationship 244 Subcontractor–Owner Claims 245 Suppliers 245 Documentation of General Contractor/ Subcontractor/Supplier Transactions: Documenting Delays 248 10.7. Other Contractor–Subcontractor Claim Issues 249 10.8. Subcontractor Licensing 254 10.9. Subcontractor-Specific Claims Publications 254 10.10. ConsensusDocs Standard Form Subcontracts 254 10.11. Conclusion 255 Endnotes 256

Chapter 11. Pricing Construction Claims and Change Orders ...... 259 Donald Harrington, R. Brent McSwain, Rex Snyder, and James L. Giles 11.1. 11.2. 11.3. 11.4.

Introduction 259 Forward Pricing 261 Post Pricing 266 The Proposal—Request for Equitable Adjustment 272 11.5. Impact and Inefficiency Costs 278 11.6. Material Costs 283 11.7. Equipment Costs 288 11.8. Overhead and Profit 296 11.9. Total Cost 304 11.10. Other Elements of Claim Pricing 306 11.11. Conclusion 314 Endnotes 314

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Chapter 12. Negotiations ........................................................................ 321 Kathleen O. Barnes 12.1. Introduction 321 12.2. The Need for Contract Negotiation 322 12.3. Determining Your Bottom Line 324 12.4. Preparation for Negotiations 333 12.5. Other Considerations 337 12.6. Bargaining-Table Tactics 339 12.7. Memorializing the Deal 340 12.8. Conclusion 343 Endnotes 343 Chapter 13. Dispute Avoidance and Alternative Dispute Resolution............................................................................ 347 Adam K. Bult, David W. Halligan, Jonathan Pray, and James G. Zack Jr. 13.1. 13.2. 13.3. 13.4. 13.5. 13.6.

Introduction 347 Predispute ADR Methods 348 Initial Claims and Dispute Phase 355 Alternatives during Litigation 376 Trial by Reference (Referee) 379 Administrative Dispute Resolution Act and the Federal ADR Experience 379 13.7. Formal Administrative and Judicial Dispute Resolution 380 13.8. Conclusion 382 Endnotes 383

Chapter 14. Termination of Construction Contracts ........................ 387 Dorothy E. Terrell and Nicholas J. Surace 14.1. Introduction 387 14.2. Termination for Default 387 14.3. Termination for Convenience 391 14.4. Termination by Contractor 394 14.5. Private Clauses 394 14.6. Conclusion 396 Endnotes 396

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Chapter 15. Bonds and Liens ................................................................ 399 Rebecca Glos 15.1. Overview 399 15.2. Construction Bonds 400 15.3. Liens and Stop Notices 403 Endnotes 408 Chapter 16. Insurance Issues: Construction Claims of a Different Nature ................................................................ 411 Scott C. Turner 16.1. Introduction 411 16.2. Greatest Potential Trap 412 16.3. Common Construction-Related Insurance Policies 412 16.4. Insurance Basics 422 16.5. Conclusion 429 Endnotes 430 Chapter 17. Alternate Project Delivery: Claims in Design-Build, Guaranteed Maximum Price, and Other Delivery Methods .............................................................................. 431 Richard E. Burnham and Mark F. Nagata 17.1. Introduction to Changes in the Context of Alternate Project Delivery Methods 431 17.2. Changes in the Context of a GMP Contract 432 17.3. Changes in the Context of a Design-Build Contract 449 17.4. Conclusion 456 Endnotes 457 Case Law Index 459 Subject Index 465

Foreword

The construction industry has always been an indicator of the health of national and global economies. Today’s construction industry is characterized by complex and large-scale construction projects; involvement of diverse, and potentially multicultural, associated stakeholders; poorly prepared and/or executed contract documents; tight financial constraints; unfair allocation of risks; and communication problems. Thus, changes after the work starts are not unusual and are sometimes the standard. This environment provides fertile ground for development of construction claims. If not amicably settled, construction claims escalate to conflicts and disputes. In all cases, construction claims, conflicts, and disputes negatively affect the construction industry, its people, and the world economy. For these reasons, providing the construction industry with an easy-to-use resource that collectively addresses the aforementioned challenges is crucial. This third edition of Construction Contract Claims, Changes, and Dispute Resolution fills this knowledge gap. Contributing experts with a diverse skillset in construction law, construction consulting, and academia provide the reader with best practices for identification, notification, documentation, delay and cost analysis, pricing, negotiation, resolution of claims, and changes under construction contracts. In doing so, the book addresses conventional and innovative project delivery methods and covers the broad range of stakeholders, including owners, designers, contractors, subcontractors, suppliers, manufacturers, and surety. Accordingly, this book provides a comprehensive guide that should help alleviate and mitigate matters of paramount importance to the construction industry. As an academician, researcher, and industry consultant, I have used and benefited from the previous two editions of Paul Levin’s book. This third edition also does an outstanding job of addressing the new, evolving characteristics of contracting in the 21st century as related to xiii

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claims, changes, and dispute resolution. Accordingly, I invite you to read this book trusting that you will agree with me on its value.

Islam H. El-Adaway, Ph.D., F.ICE, M.ASCE Associate Professor of Civil Engineering Construction Engineering and Management Program Coordinator The University of Tennessee–Knoxville

Preface

This work is intended to serve as a handbook for those who are engaged in construction contracting and involved with or in a position to influence the prevention, preparation, management, and resolution of construction claims and change orders. Shaped by the outcomes of federal and public construction cases, the general guidelines and legal principles covered in this book should be of value and apply to those involved in private-sector commercial and public-private partnership (PPP) construction projects. Interpretations of the law contained in this handbook are solely those of the writers and are not intended to serve as legal advice. Originally published in 1978 and last updated in 1998, this book merges principles of construction law with practical advice to aid those involved in the construction claims process. Originally directed to contractors, many engineers, owners, and construction managers also purchased the publication as a project guidebook, reference, and training manual. In the past 35 years, the principles of construction law have changed very little. The major focus is for all parties involved—engineers, architects, owners, and contractors—to be aware of these principles, strive to reduce or eliminate factors that give rise to disputes, and establish procedures for expeditious and fair resolution of inevitable claims. As in the first two editions, this revamped third edition of Construction Contract Claims, Changes, and Dispute Resolution attempts to continue the tradition of straightforward, simple approaches. For more information on claims, documentation tools, recent cases, and links to construction/claims-related resources, please visit the ConstructionProNet.com website.

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Acknowledgment

I am grateful to the individual authors who set aside time from their busy law and consulting practices to provide the benefit of their expertise in their respective chapters. As our society grows in complexity, so do the intricacies of our day-to-day work lives, which call for more specialized knowledge to solve specific problems. For that reason, in this edition I chose to rely on subject matter experts to provide the reader with knowledgeable, authoritative, and up-to-date content. In addition, I am grateful to my employer and my family, who allowed me to spend the many hours needed to produce the book and prepare the manuscript for submission to ASCE Press. Paul Levin, PSP

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Contributors

Chapter 1—Introduction Paul Levin, PSP, has more than 25 years of contract administration, project management, scheduling, and claims consulting experience involving a wide variety of projects, including nuclear and hydroelectric power plants, transit systems, railroads, convention centers, warehouses, recycling plants, office buildings, and aquariums. He has devoted an equal amount of time to writing and publishing editorial content on construction topics, including claims, project controls, green building, scheduling, building information modeling (BIM), and most recently the use of drones in construction.

Chapter 2—Claim Identification and Notification Joseph A. McManus Jr. is a partner in the construction law firm of McManus & Felsen LLP. He is a graduate of the College of the Holy Cross and obtained his JD from Duke University School of Law in 1972. He is a past president of the American College of Construction Lawyers, a fellowship of the 170 leading construction lawyers. He frequently serves as an arbitrator on local, national, and international cases. He is a member of the Large Complex Case Panel of Arbitrators, a mediator (American Arbitration Association), and a member of the Chartered Institute of Arbitrators. He has appeared as an expert witness in cases involving construction documents, specifically American Institute of Architects documents, in the United States and the Caribbean. xix

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He advises clients on construction and commercial issues and disputes. He gained this experience in construction and public-contracts law as a lawyer in the U.S. Air Force Judge Advocate General’s Corps, as general counsel to Clark Enterprises, Inc., and as a member of his own firm. He has represented many public owners, including the Metropolitan Washington Airports Authority, the District of Columbia Council, the government of Barbados, and the government of Greece. Karlee Starr Blank is an associate with the construction law firm of McManus & Felsen LLP. She graduated cum laude from Columbia University with a Bachelor of Arts in 2012, and she obtained her JD from Duke University School of Law in 2015. Prior to law school, she worked in India, Turkey, and the United States as an instructor and program development manager for In-V-Ent-Ed, a global entrepreneurship education program. In 2009, she received a grant to design and bring solar heating and lighting technology to a remote school in Qinghai Province, China. At Duke Law School, she was named in 2013 the Inaugural Jeroll R. Silverberg Scholar. In recognition of her pro bono work, Ms. Blank was named the recipient of the 2015 Duke Law Clinics Advocacy Award. In her third year of study, she completed a Capstone Project titled American Law Firms: How to Mitigate the Risk of Legal Malpractice Liability When Collaborating with Overseas Legal Counsel. She previously worked as a law clerk at McManus & Felsen LLP, assisting the firm’s attorneys with client matters and collaborating on publications such as the 2014, 2015, and 2016 revisions to the “When and How to File a Federal Contract Claim” chapter of the Aspen Construction Law Handbook.

Chapter 3—Differing Site Conditions Marilyn Klinger is located in the Los Angeles office of Sedgwick LLP and is involved in all aspects of construction law on state and national levels. She is 2014Chambers-ranked in construction law. She represents the full spectrum of the construction industry, including owners, contractors, subcontractors, and sureties. Her practice includes time-related claims and litigation (delay and impact), legal advice and counsel regarding the contracting process (bidding and

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contract disputes and performance bond claims), payment enforcement and defense (payment bonds, mechanic’s liens, and stop payment notices), administrative and scope claims and litigation (differing site conditions, change and extra work orders and inadequate plans and specifications, and subcontractor substitutions), and counseling and transactional services to the construction industry (general advice and counsel, including contract preparation, evaluation, and negotiation).

Chapter 4—Interpretation and Requirements of Contract Specifications Brian W. Bennett is the founding partner and owner of Bennett Legal Group, P.A., in Orlando, Florida. He is Florida Bar Board Certified in Construction Law and has represented various participants in the construction process, including owners, general contractors, design professionals, and major subcontractors. He has several years of practical experience in civil engineering and general construction prior to attending law school. His civil engineering experience includes the design of sanitary sewer, water distribution, and storm drainage systems for various residential and commercial developments. His general construction experience involved project management of commercial projects including a $10 million dormitory for the College of Charleston and a $7 million alumni center for the University of North Carolina at Chapel Hill.

Jonathan M. Blocker is an associate with the firm of Christian & Small LLP, in Birmingham, Alabama, where he practices professional liability defense, construction, and aviation law. Prior to joining the firm, he practiced construction law in Florida. Mr. Blocker also served three years as an assistant state attorney for the Office of the State Attorney, Ninth Judicial Circuit of Florida. Working in both Orange and Osceola counties, he prosecuted hundreds of criminal cases and more than 25 jury trials to verdict for crimes of violence, burglary, and drug trafficking. He is licensed to practice law in Alabama and Florida.

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Chapter 5—Construction Project Delays and Time Extensions Thomas D. Fertitta, PSP, founded TDF, LLC, in April 2001 as a construction consulting services company. Since 1981, his construction experience has included project management, cost estimating, and fieldwork coordination of shell and tenant improvements on various facilities such as high-rise office buildings, warehouses, and research and development buildings. He has held leadership positions with a general contractor, a real estate developer, and an international professional services firm. He has prepared construction claims and schedules for owners and contractors on private and municipal projects such as schools, office buildings, cogeneration plants, industrial facilities, condominiums, wastewater treatment plants, prisons, and courthouses. He has performed schedule analyses, demonstrating delay, disruption, acceleration and performing damage and loss of productivity calculations, as-built construction schedules, issue and entitlement identification and analysis, and document control and organization. He has provided expert witness services for negotiation, mediation, arbitration, and state and federal court regarding scheduling matters. Anthony L. Nedinsky, PSP, has amassed experience over his career in several roles, including project management, cost estimating, scheduling, field coordination and leadership, negotiation with owners, and community outreach for heavy civil projects. His experience includes constructing several types of bridges (concrete girders, steel girders and box beams, integral and semi-integral abutments, and simple spans), foundations (H-pile, drilled shaft from micropiles up to 72-inch diameter caissons), post and panel retaining walls (with and without tiebacks), mechanically stabilized earth (MSE) retaining walls, crib walls, combination walls, soundwalls (concrete post, steel post, and lightweight soundwall), and support of excavation (chance anchor, pile and lagging, pile and lagging with tiebacks, pile and lagging with rakers, and tiebacks with shotcrete). His experience also includes earthwork and roadway construction, reinforced concrete pavement, large concrete underground structure construction including architectural concrete and finishing, storm drainage, water line (up to 54-in.

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diameter), sanitary sewer (gravity and force main), gas line, ductbanks, and overhead electrical lines. He also has performed tenant fit-out work, including HVAC, electrical, plumbing fire protection, and interior finishes. He most recently worked in the project engineer role in a large segment of a $1.5 billion design-build project to construct new generalpurpose lanes, toll lanes, and multiple bridges. He has taken leadership roles in preparation of schedule analyses and claims for delay, disruption, and acceleration as well as assisting contractors and owners with specific scheduling assignments to develop, enhance, and update baseline schedules. Jeffrey G. Gilmore is the chairperson of Akerman's Construction Practice. His practice emphasizes domestic and international construction law involving a broad range of public and private matters, including engineering-procurement-construction (EPC)/designbuild projects, health care, multifamily housing, power generation, and petrochemical and infrastructure projects (transportation, water, and public safety). In addition, he has been recognized for his experience in construction matters in Chambers USA; recommended in the Southeast in the Legal 500 for construction; noted as one of the Best Lawyers in America for construction law; and listed in the Virginia Business Legal Elite in the construction category.

Chapter 6—Acceleration and Mitigation of Project Delays Christopher M. Burke is a partner with Varela, Lee, Metz & Guarino, LLP, a law firm representing clients spanning the breadth of the construction and engineering industry, including owners, developers, contractors, subcontractors, design professionals, sureties, and public agencies. He has spent his entire legal career focusing on the construction industry and has litigated dozens of disputes in the public and private sectors, both in the United States and abroad. He is well versed in the crucial elements of construction disputes, including schedule analysis, lost productivity studies, and issues of design interpretation. He is particularly knowledgeable regarding claim pricing and

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damages. He graduated cum laude from Yale University and later from the University of Virginia School of Law, where he served as a Dillard Fellow Legal Research and Writing Instructor.

Michael J. Harris is a vice president at Warner Construction Consultants, Inc., and is the leader of Warner’s Disputes Resolution Group. He is a licensed civil engineer and attorney with 35 years of construction experience, including 20 years as an expert witness specializing in construction delay, acceleration, disruption, loss of efficiency, and termination disputes. He is skilled in construction claims analysis and litigation support, having served as a testifying expert in mediations, arbitrations, and litigation. His expertise includes analysis of impacts caused by various issues, including loss of production, weather, design errors and omissions, contractor errors, change orders, manpower shortages, differing site conditions, management issues, and material shortages. His deep understanding of the construction process is founded in his background as an inspector, scheduler, construction engineer, project manager, and scheduling/estimating department manager, where he prepared detailed schedules, master schedules, and recovery schedules and reviewed technical submittals, performed constructability reviews, developed cost studies, and managed the construction of large projects.

Chapter 7—Records and Documentation Robert M. Freas advises clients on many topics, including risk management, project controls, change management, project scheduling, process improvement, change order negotiations, dispute avoidance, and the preparation or defense of construction claims. He has participated in the preparation and presentation of several major construction and contract claims and disputes. His experience with construction disputes includes the development, analysis, and defense of construction claims related to delays, inefficiencies, and cost overruns. Specifically, he has prepared as-planned schedules, updates, and time

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impact analyses; prepared and analyzed as-built schedules; and prepared delay- and performance-related analyses, productivity-impact and acceleration analyses, and cost and damages claims. He has provided risk analysis services to large construction owners and contractors, including contract risk assessments, probabilistic scheduling, Monte Carlo simulations, and schedule and cost assessments. He also has provided projectmanagement oversight and construction-management services, developed project control systems, and prepared project status reviews. W. Wesley Grover III, P.E., MBA, has more than 29 years of experience in analyzing and preparing claims relating to construction matters (e.g., identification and quantification of impact events; effect of change orders, design changes, and out-of-sequence work; and impact of quantity changes and unit price changes), government contracts, business interruption, lost profits, valuation and environmental matters, and management consulting services. He also has testified as an expert witness concerning economic damages related to construction, operating and maintenance costs, business interruption, business valuation, lost profits, repair and restoration costs, betterment, employment wage and discrimination costs, and trade-secret-related matters. He has also presented analyses to various parties including the U.S. Department of Justice, the U.S. Attorney’s Office, Office of the Inspector General, and States Attorneys General.

Chapter 8—Use of Project Schedules and the Critical Path Method in Claims John C. Livengood, AIA, Esq., FAACE, is a managing director with Navigant’s Global Construction Practice and has 40 years of experience in construction, design, delay analysis, and litigation support. His areas of expertise include construction, construction management, government contracts, litigation support, mediation, arbitration, construction litigation, cost analysis, change order analysis, delay and disruption claims, acceleration claims, and loss of productivity claims.

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As an expert witness, he has testified in court and arbitration proceedings throughout the world on delay and productivity issues and damages and causation issues. He is active in several professional organizations, including AACE International (AACE), the American Bar Association, Construction Management Association of America, and the American Society of Civil Engineers. He is President of AACE in 2016–2017. He has published numerous articles on construction claims and delay analysis and speaks regularly on these topics. He also is one of the principal authors of AACE’s “Recommended Practice on Forensic Schedule Analysis” (RP29R-03, 2011). He holds a Bachelor of Architecture from Syracuse University and a Juris Doctor from Catholic University of America.

Chapter 9—Impact on Labor Productivity from Claims and Change Orders William Ibbs, Ph.D., is professor and group leader of the construction management program in the civil engineering department at the University of California, Berkeley (U.C. Berkeley). He teaches both undergraduate and graduate courses in construction management, including scheduling, labor productivity analysis, cost management and accounting, and project management. He is a leading thinker, active researcher, and writer on construction management subjects. In addition to his academic career, Professor Ibbs is a very active consultant. He has served as an expert witness and project neutral, testifying in federal and state courts and in international arbitration. His work includes the impact project change has on labor productivity (both design and construction labor), schedule, and cost. He is probably best known for his work on cumulative impact claims, but he also has testified on matters involving professional standards of care and disputes involving cumulative impact, schedule delay, construction accounting, false claims, and loss of economic value. He has worked on some of the biggest, most complex projects in the world, including Boston’s Big Dig, reconstruction of the Panama Canal, refineries, chemical plants, hospitals, process plants, transit systems, and

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nuclear and conventionally fueled power plants. Clients include contractors, construction management (CM) firms, designers, and owner organizations throughout the United States, Africa, Asia, Europe, the Middle East, and South America. Prior to his academic career, he worked in the private sector for design, owner, and contractor organizations. He earned his Bachelor of Science and Master of Science degrees from Carnegie Mellon University and a Doctor of Philosophy degree from U.C. Berkeley, all in civil engineering with a construction management emphasis. He has minors in accounting and finance. Paul L. Stynchcomb, CCM, PSP, CFCC, is a consultant with the Ibbs Consulting Group. Formerly, he served as a senior managing director in the Forensic and Litigation Consulting practice of FTI Consulting. He has worked in the construction industry since 1984 as an expert in critical path method (CPM) scheduling, construction management, contract administration, and labor productivity. Prior to 1984, he held construction management positions in several major U.S. construction firms. He has been qualified as an expert in CPM scheduling, construction management, contract and subcontract administration, delay and cost impact analysis, and loss of labor productivity in federal and state courts, boards of contract appeals, and the Court of Federal Claims and before tribunals of the American Arbitration Association and International Court of Arbitration (ICC).

Chapter 10—Subcontractors and Suppliers Christopher M. Anzidei, Esq., is an attorney with extensive experience in drafting construction contracts and resolving commercial disputes. Mr. Anzidei is currently an in-house attorney for the Catholic Archdiocese of Washington, DC, where he handles primarily construction and real estate matters, and he was formerly the principal of a boutique law firm that specialized in construction, surety, and government contracts law. Mr. Anzidei received a Bachelor of Arts, with high honors, from Rutgers University and a Juris Doctor from Georgetown University Law Center.

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Prior to opening his own firm, he clerked for the Honorable Robert J. Yock, United States Court of Federal Claims, and later rose to partner at a large, national construction law firm. He is a frequent lecturer and author for many national trade organizations, and he is an adjunct professor at Georgetown Law.

Chapter 11—Pricing Construction Claims and Change Orders Donald Harrington is vice president of Sage Consulting Group, a national consulting firm based in Denver, Colorado, specializing in the analysis and preparation of construction claims and contract surety defaults. He has more than 30 years of experience in construction claims with expertise including schedule analysis, cost estimating, damage calculations and allocations, impact and inefficiency analyses, and means and methods reviews and contract interpretation. He has testified in various state and federal courts throughout the United States and in front of numerous arbitration panels and dispute review boards. He is a Certified Professional Constructor and a member of the American Institute of Constructors. He is a Certified Construction Supervisor in several Colorado jurisdictions. He received a Bachelor of Science in Civil Engineering from the University of Colorado. R. Brent McSwain is a senior consultant at Sage Consulting Group. He has worked as an owner representative, responsible for developing multimilliondollar acute-care hospital facilities, offices, warehouses, correctional and probation facilities, and recreational facilities and for administering disaster recovery services. He also was a project manager for a major general contractor responsible for executing multimillion-dollar projects, including the National Water Quality Laboratory for the federal government, a regional correctional facility for a county agency, a precast parking garage for a hotel, and an office building, and he managed disaster recovery work. He has been with Sage since 2003. He has extensive experience in preparing and

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defending claims that involve schedule delays, disruptions, and damages for correctional facilities, water treatment plants, office buildings, hotels, luxury condominiums, recreational facilities, and schools. He has experience in litigation support, deposition, and trial testimony. He received his Bachelor of Science degree in Industrial-Construction Management from Colorado State University in 1981 and has worked in the construction business since 1977.

Rex Snyder is a senior consultant at Sage Consulting Group. He has more than 34 years of constructionrelated experience, including eight years of claimsrelated experience. He has performed hands-on field work, field/project engineering, project scheduling, project management, project executive, and claims analysis on a wide variety of construction projects. These projects include both public and private projects involving resort, commercial, educational, bridge, airport, and water/wastewater facilities. He has managed projects valued at up to $90 million. Drawing upon his experience in construction management, cost control, and scheduling, he provides cost analysis and critical path method scheduling analysis and implementation.

James L. Giles (deceased) is a senior consultant at Sage Consulting Group. Prior to his employment with Sage, he worked in both field installation and project management and control of electrical/mechanical projects ranging from custom residential to industrial projects. He has been responsible for the cost control and labor management of schools, manufacturing facilities, hospitals, wastewater treatment, and government projects. In his 35 years in the construction industry, he also spent considerable time working with estimating, cost accounting, and scheduling software programs. His responsibilities at Sage include the preparation and defense of construction claims caused by delays, disruptions, added work, and/or acceleration through the analysis of estimates, schedules, and accounting information.

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Chapter 12—Negotiations Kathleen O. Barnes is a senior partner with the law firm of Watt, Tieder, Hoffar & Fitzgerald, LLP. Since 1989, she has focused her legal practice on construction and complex commercial litigation, the preparation and negotiation of project contract documents, and the evaluation and preparation of claims. She has an active government contracts practice and advises contractors, architects, engineers, and owners on issues involving government contract administration and compliance. She litigates all manner of construction, commercial, and government contract matters in federal and state courts, boards of contract appeals, and in arbitration throughout the United States. In conjunction with her practice, she lectures on government contract, construction, and surety issues, and has written numerous articles on these topics. She was elected to the American College of Construction Lawyers in 2011 and has been listed in Best Lawyers in America, construction law category, since 2008.

Chapter 13—Dispute Avoidance and Alternative Dispute Resolution Adam K. Bult is shareholder at Brownstein Hyatt Farber Schreck. From hundred-million-dollar construction disputes to preliminary injunction hearings, he has spent his career litigating complex business and construction disputes in state and federal courts throughout Nevada. His complex business litigation practice includes everything from multiday evidentiary hearings and arbitrations to intricate preliminary injunction hearings and an extensive and decisive motion practice. In his construction litigation practice, he works with local companies and global entities in the industry, including design and architectural experts, construction management and claims experts, leading construction dispute resolution attorneys and arbitrators, and international construction law firms. He is accomplished at handling all aspects of construction and design litigation claims, whether they involve local contractors, public entities, or global companies.

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David W. Halligan, Ph.D., P.E., has 25 years of experience in construction management, loss of productivity, schedule delay, project controls, and dispute resolution on a wide variety of projects. He has worked on power plants and industrial process facilities, tunnels, pipelines, high-rise and residential projects, transportation projects, military and high-tech facilities, water and wastewater treatment plants, correctional facilities, hospitals, educational facilities, and dams. He has supported clients in resolving disputes involving loss of productivity and schedule delays through negotiations, mediations, dispute review boards, arbitration, and in trial. He has also provided clients assistance in matters related to schedule and cost control, cost audits, management procedures compliance audits, and change order management. He is a published author on loss of productivity in construction and has been a guest lecturer at the Construction Engineering and Management Graduate Program at the University of California, Berkeley. Jonathan Pray’s practice focuses on advising clients involved in real estate and construction disputes. He has represented clients in all aspects of the development and construction industries, including commercial and residential developers and landlords, public agencies, design and engineering firms, contractors, subcontractors, suppliers, lenders, sureties, and municipalities. He has litigated construction and real estate disputes in both state and federal courts and in private arbitrations He also regularly advises clients on the drafting and negotiation of construction contracts for public and private projects and provides advice to project participants over the course of construction—all with the goal of helping his clients resolve disputes and avoid litigation altogether. James G. Zack Jr., CCM, CFCC, FAACE, FRICS, PMP, is the executive director of Navigant Construction Forum. The Forum strives to be the construction industry’s resource for thought leadership and best practices on avoidance and resolution of construction project disputes globally. Formerly, he was the executive director of Corporate Claims Management for the Fluor Corporation, one of the world’s largest publicly owned engineering, procurement, construction,

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and maintenance contractors. He was previously vice president of PinnacleOne, executive director of the PinnacleOne Institute, and a senior construction claims consultant for CH2M HILL, Inc. For more than 40 years, he has worked on both private and public projects. In the construction claims field, he is a recognized and published expert in mitigation, analysis, and resolution or defense of construction claims and disputes.

Chapter 14—Termination of Construction Contracts Dorothy E. Terrell is counsel to the law firm of Smith Pachter McWhorter PLC, located in Tysons Corner, Virginia. Her practice focuses on the construction and government contracts industries and all phases of project development and construction, including contract formation, project management, claim preparation, defense and negotiation, litigation, and the successful resolution of disputes through various forms of alternative dispute resolution. In the construction claims and disputes areas, her experience includes domestic and international power, cogeneration, water and wastewater treatment plants, defense hydrant fueling systems, military family housing, dredging, telecommunications projects, nuclear steam generator replacement projects, dams and reservoir projects, commercial structures, and international and Middle Eastern dispute-resolution proceedings. She is a graduate, magna cum laude, of the Tulane University School of Law and is a member of the Order of the Coif. She received an undergraduate degree in accounting from the University of Virginia and holds a certified public accountant (CPA) certification from the Commonwealth of Virginia. She is a member of the ABA Construction Forum and Section of Public Contract Law. She has served on the Executive Board and as a member of Women Construction Owners & Executives, USA, and has served as co-chair, vice chair, and a member of the Construction Committee for the American Bar Association Section of Dispute Resolution. She is admitted to the Virginia and District of Columbia Bars.

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Nicholas J. Surace is an associate in the law firm of Smith, Pachter, McWhorter PLC, located in Tysons Corner, Virginia. His practice includes construction, government contracts, and white-collar matters. He has assisted clients with litigating and settling construction disputes in Virginia state court and federal district courts. Mr. Surace has also assisted clients with government contracts disputes relating to cost disallowance issues and other cost claims before the Armed Services Board of Contract Appeals and Civilian Board of Contract Appeals, in addition to assisting clients with bid protests at the state level before the U.S. Government Accountability Office, the U.S. Court of Federal Claims, and the U.S. Court of Appeals for the Federal Circuit. He assists the firm’s white collar practice with internal investigation matters. Mr. Surace is a member of the ABA’s Section of Public Contract Law and regularly attends meetings of the Accounting, Cost & Pricing Committee and the Bid Protest Committee. He is a member of the U.S. Green Building Council’s National Capital Region Chapter. Mr. Surace also serves as a Vice Chair for the ABA SEER Renewable, Alternative, and Distributed Energy Resources Committee. Prior to law school, he served in Virginia state government.

Chapter 15—Bonds and Liens Rebecca Glos is a partner within the surety group at Watt, Tieder, Hoffar & Fitzgerald LLP, who provides a full range of litigation services in all aspects of construction and surety law on a state and national level. In particular, she specializes in resolving disputes arising from residential and commercial subdivision projects. She has evaluated and argued relevant provisions of the California Subdivision Map Act before state and federal courts, and consequently she has been able to advise clients on the scope of a surety’s responsibility on a defaulted subdivision project, determining the type of work covered by a subdivision bond, options by which the surety can recover money from the construction lender, and manners in which the surety can negotiate with bond obligees to minimize the surety’s potential liability. In addition to litigating subdivision bond claims, her practice includes litigating public and private construction disputes involving

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sureties such as resolving time-related claims (delay/impact), enforcing payment defenses against bond claims, analyzing scope claims and litigation (differing site conditions, change orders, and inadequate plans and specifications), and providing counseling and transactional services to the construction industry (contract preparation and negotiation). She has handled matters involving all types of construction projects, including commercial and residential subdivision projects, water treatment plants, waste processing facilities, power plants, and state highways. She has worked in various legal settings, including arbitration and mediation, and has independently and successfully carried cases through trial.

Chapter 16—Insurance Issues: Construction Claims of a Different Nature Scott C. Turner, Esq., is an attorney at the San Francisco, California, and Washington, D.C., offices of Smith, Currie & Hancock, a national law firm specializing in construction law. He is a construction insurance attorney with more than 27 years of experience securing insurance recoveries for property losses and defense and indemnification for liability resulting from construction disputes and defects. He wrote the 1,700-page legal treatise Insurance Coverage of Construction Disputes (2nd ed. Thomson Reuters Westlaw 2016).

Chapter 17—Alternate Project Delivery: Claims in Design-Build, Guaranteed Maximum Price, and Other Delivery Methods Richard E. Burnham, construction industry executive and attorney, recently retired as director of Trauner Consulting Services, Inc. He brings years of hands-on experience with all types of projects and a spectrum of contract delivery methods from various perspectives. His past experience includes serving as a vice president of a major international contractor whose $1 billion plus annual revenue included major building and heavy construction projects for both public and private clients, as a senior manager of a major engineering company, as an advisor to public transportation agencies, and as an expert witness

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regarding the proper administration and analysis of changes, delays, and damages. As a former adjunct professor at a highly regarded engineering college, he has lectured on litigation avoidance, analysis of construction claims, and critical path method scheduling. He holds a Bachelor of Arts degree in economics from Georgetown University and received his Juris Doctor degree from Villanova University School of Law. Mark F. Nagata is a shareholder and director at Trauner Consulting Services, Inc. His expertise lies in the areas of construction claims preparation and evaluation, development and review of critical path method schedules, delay analysis, dispute resolution, specification writing, and training. He was a contributing author and continues to provide additional revisions to the AACE International’s Recommended Practice No. 29R-03 for forensic schedule analysis. This is the first industry publication to comprehensively classify the many schedule analysis techniques. His contribution included describing and defining the contemporaneous period analysis, also called the contemporaneous schedule analysis. He is a coauthor of Construction Delays: Understanding Them Clearly, Analyzing Them Correctly (Second Edition) Elsevier 2009. He also continually writes technical papers and articles for industry publications and speaks nationally on scheduling and claims analysis topics. He has presented at mediation and has extensive experience in authoring expert reports, written testimony, interrogatories, discovery requests, and questions for deposition and cross examination, and he has developed demonstrative exhibits for trial. He directs and performs all types of analyses, from schedule delay analyses to inefficiency analyses and the determination of damages. In addition to assisting clients in litigation, he evaluates project performance and change orders and works closely with his project teams to resolve disagreements and avoid disputes during construction. His analyses spread across all areas of construction, including bridge, highway, transit, transportation, museum, health care, government, schools, entertainment, laboratory, environmental, residential high-rise, nuclear, and retail projects.

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Chapter 1

Introduction Paul Levin

1.1. A More Rounded Approach to Construction Disputes The first and second editions of this book were written to provide a framework for understanding the role of claims in the construction process so they could be properly identified and supported and successfully resolved. Its scope was limited to the original author’s firsthand experience in dealing with claims related to commercial, heavy, and transportation construction projects. To make the book more meaningful as a construction claims guide and to address more recent developments in construction law, related legal and contractual issues, and the increasing use of technology in dispute resolution, the third edition of the book engaged the expertise of attorneys and expert consultants in the field to bring more knowledge, depth, and detail to the subject matter. Existing chapters were expanded—some significantly—and four new chapters were added.

1.2. Construction Claims—Background, Outlook, and Approach Claims and change orders are frequently linked as the negative outgrowth of cost overruns, mismanaged jobs, legal entanglements, and, a

Publisher and Chief Executive Officer, ConstructionProNet.com, WPL Publishing Co., Inc. 1

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Construction Contract Claims, Changes, and Dispute Resolution

occasionally, alleged questionable practices on the part of some contractors. Admittedly, claims and change orders suggest to most laymen and owners a costly, nonproductive aspect of the construction process. However, this is a misconception. Claims and change orders are an integral part of the construction process, and good administrative practices are as important for claims management as they are for engineering, safety, and business management. Administrative processes are required to handle construction events—changed conditions, design changes, defective specifications, quantity variations, delays, disruptions, and accelerations—that deviate from the contract and to successfully resolve the disputes that result from these events. This is particularly true over the last 50 years, as construction projects have become larger and more complex, the volume of disputes and litigation has grown substantially. “One may speculate as to the reasons, but it is evident that some of the factors influencing the serious and substantial increase in the number of claims for additional compensation are the complexity of the projects now being undertaken, the price structure of the industry, which does not permit the absorption of the unanticipated additional cost by the contractor, and the super-legalistic approach taken by many owners and contractors. It is not an unusual philosophy among some owners that once a contract is let and the price determined, all further financial risks or exposure should fall on either the contractor or architect. The limitation on claims today is fixed only by the limitation of ingenuity of those engaged in the construction industry, whether they be contractors, architects, engineers, or lawyers.”1 Attitudes about claims that prevailed 10–40 years ago, reflected in the previous quote, have given way to more enlightened concepts where the contracting parties are generally more proactive about identification and management of risks and are often more likely to work toward mutual resolution of disputes. The ongoing evolution of various contract clauses, the introduction of various alternate dispute resolution methods, and the increased use of more versatile project delivery methods reflect this change in attitude. Additionally, technology tools are playing a role in eliminating and resolving certain types of claims. For example, building information modeling (BIM) has substantially reduced or eliminated conflicts between various trade installations through the use of clash detection software. Even successful projects have claims. As you read this book, you will come to think of claims as standard operating procedures, and this

Introduction

3

understanding will help you formulate the proper outlook, approach, and procedures for dealing with them. The key to a successful project is the successful resolution of contract disputes without resorting to litigation.

1.3. Definition of a Claim In 1980, the federal government defined a claim as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in sum certain, the adjustment or interpretation of contract terms, or other relief arising under or related to a given contract.”2 In 1987, the American Institute of Architects’ (AIA) standard form construction contract, General Conditions (AIA A201),3 added, “A claim is a demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of contract terms, payment of money, extension of time or other relief with respect to the terms of the Contract.” Since claims often start out as change orders, or vice versa, the term “claim” is used in this book to cover both claims and change order situtations.

1.4. The Purpose of This Book The purpose of this book is to describe the general nature of claim problems encountered on construction projects and to serve as a guide for effective claims management and dispute resolution. It covers most pertinent topics potentially anticipated on the typical construction project without being so detailed or so broad as to be meaningless or burdensome. This book should help members of the construction team feel comfortable with claims and change orders and understand how to approach new situations encountered on the job. The book does not attempt to give specific answers to all claim situations and is not intended to make the contracting parties completely self-sufficient in the resolution of claims. When legal assistance or expert help is needed, it should be sought. This book also provides the construction project staff with a frame of reference with which to understand and administer construction claims and change orders. Because the change order problem is such an integral

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Construction Contract Claims, Changes, and Dispute Resolution

part of the construction process, each member of the construction project staff must have a full understanding of the legal concepts and administrative workings of changes and claims. This includes the architect, engineer, owner, owner’s representative, and/or construction manager. Ensuring that the project receives equitable adjustments without creating financial burdens for the contractor and owner is necessary. Finally, the contractor and owner should pursue and resolve changes early and accurately to ensure successful construction and avoid expensive litigation occurring at the end of the project. To this end, Chapter 13 on alternative dispute resolution is particularly important.

1.5. Public Contracts Many topics covered in this book originated from problems encountered during performance of public (government) contracts that have produced claims in the past. Many resulted in board of contract appeals and/or U.S. Court of Federal Claims4 trials, with decisions that established an extensive body of law concerning public construction contracts. This body of law largely involves Federal Acquisition Regulation (FAR) provisions, which provide uniform policies and procedures for acquisitions by executive agencies of the federal government and some federally funded public projects. These provisions also serve as a model for many state and local government construction contracts. Of particular importance is the Changes clause (FAR ¶52.243-45), which provides the contractual vehicle for which most equitable adjustments are made for changes to the contract on federal government projects.

1.6. Private Contracts While originating from public contracts, the principles and lessons of this book also apply to private construction. Indeed, the body of decisions handed down from the federal courts and boards of contract appeals has shaped construction law as a whole, with the subsequent development of related clauses in both public and private contracts. However, private construction contracts vary from state to state and from owner to owner. Owners and contractors draw up contracts to suit their own

Introduction

5

respective interests. Familiarity with and understanding of the terms and conditions of each new contract is essential before signing so that each party is fully aware of its obligations and risks. The private contractor or construction manager should be familiar with standardized contract forms, and he or she should carefully study any changes or variations encountered in new contracts. When using this book, the nongovernment construction manager should reconcile the general principles of commercial contract procedures with the similarities of public contracts explained here. Where private contracts do not have the sophisticated claims machinery found in standardized government contracts, contract changes must be handled in a manner suitable to the particular contract doucument signed by the parties. When a claims situation arises, the private contractor—perhaps upon the advice of an attorney—must analyze the particular problem and determine whether it is compensable under a specific clause or under the implied terms of the contract.

1.7. Beyond the Contract—Principles of Construction Law Interpretation and resolution of contract disputes are not limited to the contract documents. Trade custom and practice have significant influence on how contractors prepare and carry out the plans and specifications. Implied obligations include the adequacy and sufficiency of the specifications, the duty to plan and coordinate the work of multiple contractors, the duty to cooperate in various construction processes, and specific past dealings of the parties. Together, these concepts form the current body of construction law. The body of construction law and practices, informally referred to as the “principles of construction law,” is well established and has changed little in the past 40 years. This book introduces the rights, customs, and practices that comprise these principles. Such tenets as “one party shall not hinder or delay the progress of another,” the various types of delays, concerns over two types of differing site conditions, and rules of contract interpretation are revisited frequently during the progress of a construction project. A working familiarity with these principles underlies successful administration of the construction process.

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Construction Contract Claims, Changes, and Dispute Resolution

1.8. Policies and Procedures for Administration The constraints of cost, time, and the environment leave little room for perfect contract documents or perfect construction conditions. The contractor is committed to build the project within the constraints of budget, the contract documents, and good construction practices. Any variance from these constraints can cause variations in time or cost, and thus remedies are sought through contract claims and change orders. Finally, changes in time or cost must be formalized through a signed modification to the original contract. Contractors are encouraged to put into place formal policies and procedures to handle change orders including notification, documentation, pricing, and final resolution.

1.8.1. Basic Procedures for Claims and Change Order Administration For self-protection and to maximize the chances of adequate and profitable recovery, contractors must have sound, systematic policies and procedures to administer all claims and change order situations. The basic procedures for claims and change order administration are • • • • • • •

Contract knowledge—ability to recognize and identify changes, Notification, Systematic and accurate documentation, Analysis of time and cost impacts, Pricing, Negotiation, and Dispute resolution and settlement.

1.8.2. Active Claims Policy—The Right to Claims Recovery Some contractors avoid an active and aggressive claims and change order administration policy. This is due in part to the history of construction contracts and the public record of litigation and costly overruns, which should not be a deterrent, but a signal of the importance of claims administration. The contractor has the contractual and legal right to pursue recovery of increased costs attributed to valid claims and change orders. It is the naive contractor who wishfully attempts to establish better relations with the engineer or owner by downplaying

Introduction

7

claims and change order problems. Such a contractor only creates a false sense of security, neither recognizing the owner’s need for information nor allowing for discontinuities due to personnel changes, and therefore often contributes to costly litigation.

1.8.3. Active Claims Program An active program of claims and change order identification and notification is the only way to apprise the owner of adverse or potentially adverse job conditions. It is necessary to advise the owner of the potential magnitude of cost and time effects early enough to secure adequate funds and make appropriate and timely adjustments, which the owner otherwise would not, or could not, do alone. Most owners will respect a contractor who makes the effort to isolate changed conditions and potential claims encountered on the project. This becomes more valuable when the owner participates in effecting remedies. An active claims program that encourages early notification gives the owner ample opportunity to implement any procedures necessary to monitor each claim situation, such as tracking extra work hours and resources, that will be expended by the contractor. Early notification with request for direction from the owner increases the chances of early resolution and spares both parties from unfavorable surprises later on. Strong organizational procedures and project controls form the backbone of a successful construction company and set the stage for a strong claims management program.

1.8.4. Procedural Roadblocks and How to Overcome Them Ignoring claims administration practices until the job is well underway can lead to multiple problems down the road. Lack of experience in processing claims, lack of awareness of claim situations, and lack of knowledge of legal and contractual rights also serve as road blocks to setting up claims administration polices and procedures. By providing contemporary information and highlighting important elements of each topic, this book is intended to serve the reader as a reference guide as well as to help the contractor, owner, or construction manager develop their own claims administration policies and procedures. This will enable the project staff to successfully administer the claims and change orders on their projects with confidence and purpose.

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Construction Contract Claims, Changes, and Dispute Resolution

1.9. New Format for the Third Edition This new edition comprises chapters contributed by multiple authors, known in the publishing industry as an “edited volume.” This gives you, the reader, the expertise of experienced practitioners who deal with contractual issues on a day-to-day basis and are current on construction law trends and decisions. The next section introduces the authors and the chapter changes and new additions.

1.10. Review of Chapters Chapter 2, “Claim Identification and Notification,” discusses the “hows” and “whys” of identifying claims and notifying the owner of all potential problems. Developed by long-time construction attorney Joe McManus and associate Karlee Blank, this is one of the most important chapters, because proper notification is paramount to avoid losing rights to submit a claim and to establish the foundation for ultimate proof and recovery. Chapters 3, 4, 5, and 6 review the several areas of contract difficulties— differing site conditions, contract specifications and interpretations, and delays and accelerations—most often encountered on construction projects. Increased knowledge of these topics substantially enhances the identification process. Chapter 3, “Differing Site Conditions,” written by construction attorney Marilyn Klinger, examines the obvious and not-so-obvious situations that may constitute a changed site condition. Chapter 4, “Interpretation and Requirements of Contract Specifications,” is one of the more interesting subjects in this book. Every construction project is a unique design accompanied by a unique set of contract documents. Design is limited, or should we say “unlimited,” only by the imagination of the designer. Naturally, then, the development of the specifications and drawings that comprise the contract documents will give rise to questions and conflicts. Attorneys Brian Bennett and Jonathan Blocker dive into this fascinating topic, providing examples and methods developed over the years to help the contracting parties properly interpret contract documents and resolve disputed items.

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In the original book, Chapter 5 covered the topic of delays and acceleration because acceleration was frequently necessary to overcome delays. For this edition, these two topics are split into two chapters. Chapter 5, “Construction Project Delays and Time Extensions,” by consultants Tom Fertitta and Tony Nedinsky and attorney Jeff Gilmore—all experienced in preparing and defending claims on major infrastructure projects over the past 30 years—delves into the various types and causes of delay. The remedies—time extensions and/or compensation—depend upon the delay type. The authors provide suggestions for documenting, proving, and pricing delay claims. Chapter 6, “Acceleration and Mitigation of Project Delays,” is new. As in Chapter 5, an attorney, Chris Burke, and a consultant, Michael Harris, team up to explain the oft-overlooked concept of mitigating delays, which the contractor is obligated to do notwithstanding the causes. The fine line between mitigation and acceleration is explained, along with the various types of acceleration and the necessary documentation and proof to support and price an acceleration claim. Good documentation and administrative procedures are paramount to the success of any construction project. For successful change orders and claims management, they are essential. In Chapter 7, “Records and Documentation,” Bob Freas and Wes Grover describe the types of job records necessary for claim substantiation and analysis. The chapter also introduces special forms for claims administration and record keeping. Ultimately, the success of many claims depends on the sufficiency and usefulness of project documentation. Project scheduling, in particular critical path method (CPM) scheduling—its impact on the job, its importance in claims and change orders, and its use as a valuable tool for pricing and negotiations—is explained in Chapter 8, “Use of Project Schedules and the Critical Path Method in Claims.” Damages and time recovery on project delays and impact rely almost exclusively on the use of schedules to prove delays. Consultant, expert, and attorney John Livengood explains the various considerations for a schedule analysis. New to this edition is an extensive chapter on the “Impact on Labor Productivity from Claims and Change Orders” by consulting experts Professor William Ibbs and Paul Stynchcomb. Topics included in Chapter 9 are causes of lost productivity, lost productivity measurement, cumulative impact, and the results of various lost-productivity research projects.

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Construction Contract Claims, Changes, and Dispute Resolution

Chapter 10, “Subcontractors and Suppliers,” reviews special problems for suppliers and subcontractors. Attorney Chris Anzidei explains how contract language plus varying rulings from state to state play a role in the risks and concerns of those providing or furnishing labor, material, and equipment on a project as a subcontractor or supplier. Chapter 11, “Pricing Construction Claims and Change Orders,” discusses the broad range of costs that can be included in claims and change order proposals. The consultant team of Don Harrington, Brent McSwain, Rex Snyder, and Jim Giles discuss preparation, pricing, and support of requests for equitable adjustments (REA) plus techniques and methods of calculation. In Chapter 12, “Negotiations,” attorney Kathleen Barnes rounds out the book’s coverage of day-to-day claims management with a practical discussion of negotiations, including goals, strategies, and techniques. The important end result of all claims and change orders is a negotiated settlement, properly documented and executed. Chapter 13, “Dispute Avoidance and Alternative Dispute Resolution,” by attorneys Adam Bult and Jonathan Pray and consultants Dave Halligan and Jim Zack, covers the topic of resolving disputes when the parties cannot negotiate them. This includes formal procedures of litigation before arbitration panels and courts and boards of contract appeals, but the major focus is on the use of alternative dispute resolution methods. This chapter is intended to decrease expensive claims litigation costs through the increased use of mediation, partnering, dispute resolution boards, and other methods. Chapter 14 goes in depth into the details of “Termination of Construction Contracts.” Attorneys Dorothy Terrell and Nick Surace review what you need to be aware of in the event your contract is terminated, or, if you’re an owner, considerations necessary before terminating a contractor. The last three chapters are also new to the third edition. In Chapter 15, “Bonds and Liens,” attorney Rebecca Glos provides a thorough rundown of the role of bonds and liens on a construction project and how they relate to the claims process. In Chapter 16, “Insurance Issues: Construction Claims of a Different Nature,” construction insurance attorney and authority Scott Turner provides a detailed review of the various insurance coverages that exist—or should exist—on a construction project. Circumstances exist in which insurance may cover damages of what might otherwise be addressed as a construction claim. In Chapter 17, “Alternate Project Delivery: Claims in Design-Build,

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Guaranteed Maximum Price (GMP), and Other Delivery Methods,” Rick Burnham, a consultant and attorney, and consultant Mark Nagata provide insight and practical tips on dealing with the unique challenges of claims and change orders on guaranteed maximum price Guarnteed Maximum Price and design-build contracts, two alternate project delivery methods that have increased in favor over the past several years.

1.11. Owners, Designers, and Their Representatives While this book originated as a guide for the construction contract manager and project staff, other members of the construction team can benefit substantially from it, including • Project owners—those individuals serving as executives and decision makers for public agencies and private owners, • Designers—the engineers and architects retained to prepare the contract drawings and specifications, and • Owner’s representatives—the construction managers and resident engineers retained to represent the project owner’s interests during construction.

Honesty and candor between the owner and the contractor are necessary for progressive construction management. Any information that furthers such understanding while reducing adversarial attitudes will improve project performance.

Endnotes 1. Leslie A. Hynes (1971). “Construction Law.” Contractors Management Handbook, J. J. O’Brien and R. G. Zilly, eds., McGraw-Hill, New York, 22–28. 2. Policy Letter No. 80–3 (1980). Office of Federal Procurement Policy, 45 Fed. Reg. 31,035 (May 9); FAR ¶33,201 and 52.233-1. See https://www.acquisition.gov/? q=/browse/far/33 and https://www.acquisition.gov/?q=/browse/far/52. 3. ¶4.3.1 in 1987 edition; moved to ¶15.1.1 in the 1997 and 2007 editions. 4. This court has undergone a few name changes in recent years. Previous names include “U.S. Court of Claims” and “U.S. Claims Court.” 5. FAR ¶52.243-4. See https://www.acquisition.gov/?q=/browse/far/52.

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Chapter 2

Claim Identification and Notification Joseph A. McManus Jr.a and Karlee Starr Blankb

2.1. Definition of a Claim Federal government contracts define a claim as “a written demand or written assertion by one of the contracting parties seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract.”1 Most states and municipalities have adopted similar language in their definitions.2 In the nonpublic arena, a claim is defined by standard form construction documents, including the Engineers Joint Contract Documents Committee (EJCDC3) and the International Federation of Consulting Engineers (FIDIC). The American Institute of Architects (AIA), which publishes some of the most commonly used standard forms, defines a claim as “a demand or assertion by one of the parties seeking, as a matter of right, payment of money, or other relief with respect to the terms of the Contract.”4 This book focuses on contract-based claims—rather than causes of action sounding in tort or arising from common law—because they are most likely to arise in construction law. Please note that the information presented in this chapter does not constitute legal advice. Readers should consult with an attorney before taking any action based on information a

Partner, McManus & Felsen LLP. Associate, McManus & Felsen LLP.

b

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contained in this chapter, particularly with respect to the notice provisions, time limits, jurisdictional predicates to stating a claim, and general procedures summarized in this chapter.

2.2. Claims Consciousness “Claims consciousness,” or active familiarity with and awareness of potential claim situations, is a prerequisite for successful project management. This does not mean the contractor should seek every possible opportunity to earn extra revenue. It does mean the contractor should be aware of the potential risks associated with claims and that one of his or her highest priorities should be proper management of these risks. Proper claims management begins with identification of a claim. The contractor must be able to recognize and identify a claim situation when it first develops, not after it has become a controversy. Identification goes hand-in-hand with notification. Most public and private contracts contain clauses requiring notification of differing site conditions, changes, and delays within a stated period of time before equitable adjustments can be pursued.

2.3. Two Elements of Every Claim Every claim consists of two elements: (1) identification of and entitlement to recovery and (2) quantification. Recognizing a claims situation often depends upon knowing that you are entitled to recover for extra costs and time, either by contract or by law. Identification and entitlement are discussed jointly because they are largely interdependent. To determine whether the contractor is entitled to pursue a claim, project personnel must identify the operative entitlement provision of the contract, state how the owner has breached the contract, and identify how the contractor seeks relief pursuant to contract requirements. And to identify a possible claim, project personnel must understand the conditions entitling the contractor to pursue such relief. Quantification defines the dollars and days for which you believe you are entitled to recover. These are your “damages.” A causal nexus must exist between damages and the situation entitling you to recovery.

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This often requires proof that the owner proximately caused the breach and that the resultant damages were reasonably foreseeable. We discuss both elements in the following sections.

2.4. Identification and Entitlement Contractors must identify potential claims situations internally to make further inquiries as to the impact of, for example, constructive changes to the contract, and then give timely notice to the owner of the claim to preserve the contractor’s entitlement to compensation.

2.4.1. Importance of Identification Identification of a claims situation is the first and most important phase of the entire claims process. You cannot remedy a problem unless you know it to exist. Very often, identification is automatic, such as a change order from the owner or a directive from the engineer. Most claims situations, however, arise from subtle differences in field conditions, jobsite delays, or differences of contract interpretation. In every instance, a claim situation must be recognized and identified as soon as it occurs.

2.4.2. Early Identification Prompt identification and notification are imperative for compliance with contractual requirements. If the contractor does not recognize a situation or waits too long to take action, any and all rights to claim can be lost. Early identification is important for three main reasons: 1. It enables owners to verify, confirm, and possibly remedy the situation at the earliest opportunity. 2. Sometimes a changed condition may require new designs, new material or equipment, or different construction methods. Spotting and solving time-consuming and costly problems as early as possible is mutually beneficial for all parties. Even though equitable adjustments are ultimately made, the contractor benefits from completing his or her work and moving out as soon as possible, which implies making every effort to expedite the resolution of all changes and claims situations.

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3. Early identification allows the contractor adequate time to study the problems, analyze different proposal and notification options, and best prepare for claims that might prove troublesome.

2.4.3. Two Requirements of Entitlement—Knowledge of the Contract Documents and Familiarity with Construction Law The contractor must understand its rights and obligations under the contract documents and pursuant to applicable law in order to best protect its interests on a project. First Requirement of Entitlement: Knowledge of Contract Documents To fulfill the first requirement, contractual grounds for recovery, the construction project staff must have a good working knowledge of the contract documents. This applies to the project manager, the project engineer, the general superintendent, and the engineering support staff. Familiarity with pertinent technical and general terms is essential for project personnel to recognize their contract rights and duties. If these key personnel have a thorough and detailed picture of the entire job, they will be in the best position to recognize claims and change order situations immediately as they occur. Additionally, a thorough understanding of the contract documents helps to anticipate the flow of work and predict potential problems. Second Requirement of Entitlement: Familiarity with Legal Concepts and Rights The second requirement of identification is that the project staff has a working familiarity with the legal concepts and rights that will affect the outcome of potential claim situations. With a firm background in these legal concepts, the contract manager can perceive and appreciate the significance of events that may lead to later problems.

2.4.4. Frame of Reference To help recognize less obvious problems, a frame of reference to measure job performance must exist. With the contract specifications as a general plan and the contractor’s detailed engineering and scheduling activities,

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project management personnel have a standard with which to compare the actual work with the project’s budget. Cost reports are another good indicator of progress, as long as they are accurate and current.5 When measurements indicate that work items are not progressing as planned, the manager should try to determine whether design problems, adverse job conditions, or other outside factors are contributing to the overruns. Field personnel may not be cognizant of the conditions promised by the specifications and may be plugging away to overcome unnecessary obstacles, often at extra expense and needless frustration.

2.4.5. Communications Communication of ideas—and problems—is essential for efficient construction and effective management. Day-to-day communication among supervisory personnel, foremen, and management must be supplemented with routine management observation of field operations. The project staff must be knowledgeable about expected field conditions and aware of actual conditions that differ from those expected. Soil types, interference of structures, other contractors, traffic, weather, and labor composition are likely sources of changed conditions. Requiring general foremen, supervisors, superintendents, and labor foremen (if possible) to note unusual items on a designated spot on their time cards and daily diaries supports this observation (and communication) philosophy.6

2.4.6. The Changes Clause The contractual vehicle for seeking price and schedule adjustments largely depends on the specific contract in question. Concepts such as differing site conditions, suspensions of work, and acceleration appear in most construction contracts. Section 2.4.7 lists circumstances that should alert the project manager to a potential claim situation. Unless one of the specialized clauses is involved, the contractor will most frequently seek cost reimbursements and time extensions via a changes or extra work clause. The contractor must continually be vigilant for circumstances that expressly or constructively activate such a clause. To reiterate, a contractor must continually monitor site conditions and communicate regularly with on-site personnel. A contractor’s willful blindness to or ignorance of material discrepancies between contract specifications and jobsite conditions

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will preclude recovery for delays and additional costs caused by such discrepancies. As the United States Court of Federal Claims explained, A material discrepancy between what is indicated in the contract documents and what is encountered at the site can result in unanticipated costs for which the government would be liable. However, conditions which are discoverable by a reasonable site visit and diligent review of the contract documents would be chargeable to the contractor.7

Effective project management requires that the contractor keep open the right to cost reimbursement and schedule adjustments via the changes or extra work clause. Thus, skillful notification procedures, record keeping, claim pricing, and negotiations—topics discussed in subsequent chapters—are important to ensure the contractor that these clauses are used most advantageously. Reproduced below is the Changes Clause, 52.243-4, from the Federal Acquisition Regulations (FAR). The flexibility of the four enumerated change categories—which are not, incidentally, exclusive—demonstrates the importance of the clause. Note that subparagraph (b) establishes the basis for what the courts originally called “constructive changes.”8 The constructive change doctrine “provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.”9 The contractor is given the benefit of the equitable adjustment in the absence of a formal change order issued by the owner.10 Close adherence to the notice requirements is critical. This clause and similar provisions in private construction contracts are the primary vehicles for adjustments in contract price and time. Their importance and proper implementation cannot be overemphasized. 52.243-4 CHANGES (June 2007) (a) The Contracting Officer (CO) may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes— 1) In the specifications (including drawings and designs); 2) In the method or manner of performance of the work;

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3) In the Government-furnished property or services; or 4) Directing acceleration in the performance of the work. (b) Any other written order or oral order (which, as used in this paragraph (b), shall include direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order. (c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment. (d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications. (e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above. (f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract. For any contract, project management personnel must be intimately familiar with each and every requirement of the changes clause. Study it.

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Know when and how to use it. Failure to do so can mean the difference between a profitable contract and a financial disaster.

2.4.7. Warning Signs of Claim Situations The following lists the general circumstances that often cause claims and change orders: • Additional work not specified in the contract documents; • Work different from that specified; • Work in a particular manner or method that varies from that originally anticipated (from implied conditions or interpretation of specifications); • Work resulting from contract drawings or specifications that have been changed, amended, revised, amplified, or clarified; • Unanticipated work that results from insufficient details in the plans and specifications; • Work required to be performed using one particular method when specifications allow two or more methods; • Work out of sequence; • Owner furnishing equipment late, in poor condition, or not suitable for the intended use; • Accelerated performance in any way, to regain schedule, to add workers or materials, or to work overtime or extra shifts; • Any new, different, or shorter schedule; • Relocation of existing work because of lack of coordination, information, or other factors; • “Differing” site condition; • Differences in contract interpretation; • Defective specifications; • Delays from the owner’s acts or failure to act; • Unwarranted work rejection; • Increased inspection requirements, tests, or quality control program; • Owner’s failure to disclose information; • Strikes; and • Forces of nature.

The administrative aids discussed in this book ensure that the contractor has the tools needed to identify and proactively manage

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potential claims situations. Thus, the contractor can focus on his or her primary objective: successfully completing the project.

2.5. The Quantum Element of a Claim Calculating one’s damages is the primary task of quantifying losses incurred due to compensable changes on the project.

2.5.1. Quantum—Prerequisites to Recovery The purpose for stating a claim or request for equitable adjustment “is to make the contractor whole.”11 Proof of the cost must exist, and the cost must be allowable under the contract and the law governing the contract. An applicable theory of recovery must also support the contractor’s claim for damages. Quantification of the claim entails putting a dollar amount and time required to perform the extra work or to overcome the changed conditions. This section notes the relevance of costs to the claim itself. Chapter 11 of this book will go into much greater detail on cost identification, support, and recovery.

2.5.2. Quantum—Cost Identification and Support The contractor should keep a running record of all actions and costs on each changed item. To prevail on an equitable adjustment claim, the contractor must prove—by a preponderance of the evidence—the reasonableness of the costs claimed and their causal connection to the events alleged.12 To state a prima facie claim for an equitable adjustment to a contract, a contractor must show three things: liability, causation, and resultant injury.13 The most common claims for an equitable adjustment are owner-caused delay, changed site conditions, and defective contract specifications. Regardless of the type of contract, in a suit to recover damages, “[t]he claimant bears the burden of proving the fact of loss with certainty, as well as the burden of proving the amount of loss with sufficient certainty so that the determination of the amount of damages will be more than mere speculation.”14 As the Court of Federal Claims has explained, under this standard, “[o]nce a party adequately demonstrates the existence of damages, it

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need not quantify their exactness to a mathematical certainty.”15 The contractor must have a good-faith belief in the validity of the claim and documentation supporting the amount claimed.16

2.6. Notification of Claims and Change Orders Now that your project manager and field personnel are proactively monitoring the project and informing you of potential claims situations, you must notify the owner of the change or claim along with basis for the change, including the legal cause of action, to recover monetary damages for your losses resulting from the conditions. Identification of claims must be followed by notification. A claim can be filed even if no “preexisting dispute” exists between the parties.17 This fact explains, in part, why federal government contracts, most public agencies’ contracts, and many private contracts contain such extensive notification requirements. The owner or a representative should be formally notified of a claim or change order if the contractor intends to seek equitable adjustments for additional time or costs. The obvious purpose of notification clauses, such as those noted in the beginning of this chapter, is to ensure that both parties have on record the dates and facts that initiate a claims situation and to protect their respective rights. Notification allows both parties to verify conditions, assemble facts, and resolve disputes while the items are fresh in their minds. Although notice may be given orally or the contracting officer is otherwise on actual notice, the contractor will face fewer obstacles to recovery when written notice is given.18 In giving notice, the contractor should always stress his or her urgency to resolve a dispute and should request acknowledgment of the situation. Do not perform extra work before receiving the owner’s authorization: When encountering differing site conditions and errors or omissions on drawings, the contractor should stop work on that portion of work until the owner provides a satisfactory response, unless your contract provides otherwise. Continued work on the affected portion could result in a contractor’s obligation to correct at his or her own expense any defective work already completed. The government’s payment obligations may cease if contractors “volunteer” to perform additional or corrective work prior to obtaining the contracting officer’s approval.19 To claim for the costs of extra work, the contractor should show that a

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government official with requisite authority “ordered and actually compelled” the contractor to perform the additional work.20

2.7. Time Requirements For the contractor to have a valid claim for damages, the contractor should ensure its compliance with all notice specifications in the contract. The contractor should provide notice in the form specified in the contract (e.g., “written notice”), addressed to the proper person, including all necessary reference materials (e.g., e-mail correspondence), and ensure that it is received within the timeline set under the contract. The contractor must know what is required for the notice to be deemed “timely”—does it only relate to the date when the contractor gives notice to the owner (i.e., the date the notice is postmarked) or the date it is received by the owner (i.e., the date when someone signs for it on the owner’s behalf).

2.7.1. Federal Clauses The contractor must submit all claims for the contracting officer’s consideration prior to receipt of final payment on the project. The FAR recites “[n]o request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract.”21 Federal contract claims are subject to a six-year statute of limitations. “Each claim by a contractor against the Federal Government relating to a contract and each claim by the Federal Government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim.”22 This is also known as the “presentment period,” because it requires that contractors present a claim within six years from the date a claim accrues,23 meaning “the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known.”24 But the federal contractor should not rely solely on this six-year presentation period in deciding whether, and if so, when, to bring a claim. The FAR contains many provisions providing a time limit on the contractor’s ability to file a claim. The following provisions are additional notification time requirements taken from the FAR (emphasis

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added) that illustrate the layered nature of deadlines that a contractor should meet to state a valid claim: 52.243-4 Changes (d) : : : The Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change : : : shall be allowed for any costs incurred more than 20 days before the Contractor gives written notice as required. (e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order : : : or (2) the furnishing of a written notice : : : by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. (f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract. 52.236-2 Differing Site Conditions (a) The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site that differ materially from those indicated in this contract, or (2) unknown physical conditions at the site, of an unusual nature, that differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract. 52.249-10 Default (Fixed-Price Construction) (b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if—(2) The Contractor, within 10 days from the beginning of any delay (unless extended by the Contracting Officer), notifies the Contracting Officer in writing of the causes of delay. 52.242-14 Suspension of Work (c) A claim under this clause shall not be allowed (1) for any costs incurred more than 20 days before the Contractor shall have notified the Contracting Officer in writing of the act or failure to act involved (but this requirement shall not apply as to a claim

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resulting from a suspension order), and (2) unless the claim, in an amount stated, is asserted in writing as soon as practicable after the termination of the suspension, delay, or interruption but not later than the date of final payment under the contract.25

2.7.2. Private Clauses American Institute of Architects The American Institute of Architects A201 General Conditions26 document provides § 13.7 Time Limit on Claims The Owner and Contractor shall commence all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, against the other arising out of or related to the Contract in accordance with the requirements of the final dispute resolution method selected in the Agreement within the time period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the Work. § 3.7.4 Concealed or Unknown Conditions If the Contractor encounters conditions at the site that : : : differ materially from those indicated in the Contract Documents : : : the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. § 15.1.2 Notice of Claims Claims by either the Owner or Contractor must be initiated by written notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. § 15.1.5.1 Claims for Additional Time If the Contractor wishes to make a Claim for an increase in the Contract Time, written notice as provided herein shall be given. The Contractor’s Claim shall include an estimate of cost and of

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probable effect of delay on progress of the Work. In the case of a continuing delay, only one Claim is necessary.

ConsensusDOCS Article 9.4 in the ConsensusDOCS General Conditions, “Claims for Additional cost or time,” state that “[f]or any claim for an increase in the GMP or the Date of Substantial Completion or the Date of Final Completion, the Construction Manager shall give the Owner written notice of the claim within fourteen (14) Days after the occurrence giving rise to the claim, whichever is later. Except in an emergency, notice shall be given before proceeding with the Work.” (GMP means guaranteed maximum price.)27 Engineers Joint Contract Documents Committee Finally, Article 11.06 from the General Conditions of the EJCDC contract documents provides Procedures: Contractor shall submit each Change Proposal to Engineer promptly (but in no event later than 30 days) after the start of the event giving rise thereto, or after such initial decision. The Contractor shall submit supporting data, including the proposed change in Contract Price or Contract Time (if any), to the Engineer and Owner within 15 days after the submittal of the Change Proposal. The supporting data shall be accompanied by a written statement that the supporting data are accurate and complete, and that any requested time or price adjustment is the entire adjustment to which Contractor believes it is entitled as a result of said event. Engineer will advise Owner regarding the Change Proposal, and consider any comments or response from Owner regarding the Change Proposal.28

Relevant EJCDC clauses are reproduced in Appendix 2A.

2.8. Late Notice Failure to give proper and timely notice is invariably an owner’s first line of defense. State law is very important in this regard because some states hold fast to contract provisions and strictly enforce these provisions. The

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Virginia Supreme Court has repeatedly held that written notice be given “at the time of the occurrence or beginning of the work upon which the claim is based.”29 The sufficiency of an alleged notice of intent is specific to each case and varies based on the statutory and contractual circumstances of each case, such as the choice of law clause (providing which jurisdiction’s law applies to the contract and the interpretation thereof). In the federal arena, the best practice is always to give timely notice, but failure to give notice will not necessarily be fatal to the claim if the owner has not been prejudiced by the failure to give notice.30 Courts have excused contractors’ insufficient notice or failure to give notice when this failure has not prejudiced the government. Naturally, whether a failure to give notice results in prejudice will turn on the facts and circumstances of each case, so contractors’ interests are best protected by providing sufficient notice of a claims situation, in writing, and pursuant to any additional notice requirements of the operative contract. A contractor also can escape the harshness of the failure to give notice where the owner was aware of the situation or where the contractor was not immediately aware of the facts. The contractor should give notice as soon as possible after identifying a problem, even if the notice is late or informal. In one case where informal notice was given during contract performance but the formal claim was submitted after final payment, the court found that “what is necessary : : : is that the contractor reasonably manifest to the government its present intention to seek recovery of money based on a claim of legal right under the contract as a result of the alleged constructive change.”31 Consideration of a claim is not barred if “the contracting officer knew or was chargeable with knowledge that appellant had asserted a legal right to additional money despite its failure to file a formal claim”32 before the government tendered final payment. Critical path schedule submittals, inspector diaries, and meeting minutes all have been recognized as confirmation of the owner’s awareness of the situation.

2.9. Notification—Factors Involving Contract Owners For owners to be understaffed or bogged down in daily affairs so that claims and change order problems are overlooked in large projects is not uncommon. Owners should therefore be proactive in settling open

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claims and change orders; otherwise lost records and hazy memories will result, and extraneous negotiation sessions at the project’s end will be necessary. Notification and follow-up are simply a matter of obligations and protection of rights. Changes are just too costly to leave unattended in the hands of the owner and his or her representatives; follow-up is necessary to ensure that red tape, understaffing, unmotivated personnel, or insufficient funds do not impede progress. If the owner denies or rejects a claim or change order, then the contractor must reevaluate his or her position and take further action as necessary, including seeking legal assistance, filing a formal appeal, or combining the claim with another claim depending on the value and substance of the work in question.

2.10. Federal Contracts and the Contract Disputes Act Public construction currently represents nearly 27.5% of all construction spending in the United States.33 Thus, a review of the disputes and appeals procedures on federal contracts is warranted here. The federal contracting claims arena falls entirely under the auspices of the Contract Disputes Act. Any discussion of federal contract claims begins with a discussion of the Contract Disputes Act of 1978, 41 USC §§ 7101–7109, “which creates a statutory basis for claim submission and dispute resolution.”34 The Contract Disputes Act of 197835 (CDA), provides formal appeals procedures for claims denied by the government. This act includes various time requirements for the government to respond to claims, the contractor to appeal, and subsequent agency or court actions.36 Attentive readers will note that much of the CDA has been implemented in the FAR’s disputes and appeals clause, 48 CFR 33.201, et. seq.37

2.10.1. Request for Final Decision, Claims Certification For procedures under this act to take effect, the contracting officer must first render a “final decision.”38 To initiate this process, the contractor must request that the contracting officer render a final decision on its claim. Satisfying this requirement entails submitting a written,

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unequivocal statement giving the contracting officer adequate notice of the basis and amount of the claim.39 When a contractor seeks more than $100,000, the contractor must certify the claim and submit the certified claim to the contracting officer.40 In this certification, the contractor swears that the claim is made in good faith, the supporting data are accurate and complete to the best of his or her knowledge and belief, the amount requested accurately reflects the contract adjustment for which the contractor believes the government is liable, and the certifier has been authorized (by the contractor) to execute the certification on the contractor’s behalf.41 For the certification to be valid, the signatory must be authorized to bind the contractor with respect to the claim. For any claim in excess of $100,000, the following language must be used in the prime contractor’s certification: I certify that the claim is made in good faith; that the supporting data are accurate and complete to the best of my knowledge and belief; that the amount requested accurately reflects the contract adjustment for which the contractor believes the Government is liable; and that I am duly authorized to certify the claim on behalf of the contractor.42 Signed by: ________________ [name, company, position]

The contractor must take all precautions to properly certify the claim and follow to the letter the CDA notification requirements. This includes being satisfied with claims submitted on behalf of its subcontractors because subcontractors cannot bring a direct claim against the government.43 Verifying or agreeing with each and every detail in a subcontractor’s claim is not necessary, but the contractor must be confident the claim is made in good faith and is grounded in basis and in fact.44 The prime contractor is affirming that there is “‘good ground’ for the subcontractor’s portion of the claim.”45

2.10.2. Impact of a Contractor’s Failure to Request a Final Decision or Contractor’s Submission of an Invalid Request for a Final Decision Failure to clearly request a decision from the contracting officer, failure to certify claims over $100,000, and other procedural deficiencies can

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result in dismissal of a Contract Disputes Act suit or request for an agency decision.46 To minimize the chance that a claim will be dismissed for procedural deficiencies, be sure that the request for a final decision • Is addressed to the contracting officer; • States that the issue is a claim; • References prior submission(s) to the contracting officer or the CO’s representative(s); • States that the claimed issues are in dispute; • States that efforts to resolve the issue are at an impasse; • Requests a final decision on the matter(s); and • Includes proper certification if the claim is exceeds $100,000.

2.10.3. Contents of the Contracting Officer’s Final Decision A contracting officer must issue a decision on any submitted claim within 60 days of receipt of a contractor’s written request for a final decision.47 For claims exceeding $100,000, the contracting officer must either (1) issue a decision or (2) notify the contractor of when the decision will be issued, within 60 days of the contracting officer’s receipt of the certified claim.48 The contracting officer’s final decision must be in writing, and the contracting officer must send a copy of the final decision to the contractor by certified mail or by any other method of submission providing evidence of receipt.49 If the contracting officer denies the claim, he or she is required to give the contractor notice of the contractor’s appeal rights under the CDA.50 This notice usually contains the following language: This is the final decision of the Contracting Officer. You may appeal this decision to the agency board of contract appeals. If you decide to appeal, you must, within 90 days from the date you receive this decision, mail or otherwise furnish written notice to the agency board of contract appeals and provide a copy to the Contracting Officer from whose decision this appeal is taken. The notice shall indicate that an appeal is intended, reference this decision, and identify the contract by number.

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With regard to appeals to the agency board of contract appeals, you may, solely at your election, proceed under the board’s—

(1) Small claim procedure for claims of $50,000 or less or, in the case of a small business concern (as defined in the Small Business Act and regulations under that Act), $150,000 or less; or (2) Accelerated procedure for claims of $100,000 or less. Instead of appealing to the agency board of contract appeals, you may bring an action directly in the United States Court of Federal Claims (except as provided in 41 U.S.C. 7102(d), regarding Maritime Contracts) within 12 months of the date you receive this decision.51

The CO’s written decision must state the reasons for the decision reached but does not need to include specific findings of fact.52

2.10.4. Rights of Appeal Under the CDA, a contractor may seek to overturn a contracting officer’s adverse final decision on a claim or the contracting officer’s failure to render a decision within a reasonable period of time. If the contracting officer fails to render a decision within a reasonable period of time— which the CDA defines as 60 days—there is a “deemed denial” of the contractor’s claim.53 The contractor can “elect” to pursue an appeal of the CO’s final decision in one of two forums: (1) the applicable agency board of contract appeals (BCA) or (2) the United States Court of Federal Claims (COFC), as discussed in Section 2.10.7.

2.10.5. Contract Appeals, Not Bid Protests In this chapter, we focus on procurement dispute “appeals” and not “bid protests.” Bid protests arise in connection with solicitation of bids and the awards of particular contracts to particular contractors.54 A losing contractor may launch a bid protest when the contractor believes the government improperly intends to award a contract to a competitor. The bid-protest procedure is a different type of procurement issue that is beyond the scope of this chapter.55

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2.10.6. The Role of the Contract Disputes Act and Contract-Based Claims As its name suggests, the Contract Disputes Act is limited to causes of action sounding in contract, not tort. A tort is a breach of a noncontractual duty of care, meaning an independent duty recognized either in statutory or common law56 causing a claimant to directly and proximately suffer damages. Independent torts are outside the scope of the CDA and the Tucker Act.57 If, however, the alleged tort relates to or arises from a contractual obligation—such as in a claim brought against the government for an allegedly tortious breach of its contractual obligations—the disputes process outlined in the CDA applies. But, the contractor still has a high burden of proof to satisfy to prevail on a claim for a tortious breach of contract, particularly in the public-contract context. The claimant has a high burden of proof to meet when alleging that the owner acted in bad faith or engaged in tortious conduct because government officials are presumed to “act ‘conscientiously in the discharge of their duties.’”58 Because courts are “loath to find to the contrary,” the contractor must present “well-nigh irrefragable proof”59 to rebut the presumption of good faith.

2.10.7. Contractor’s Election of Forum for Appeal Under the Contract Disputes Act, a contractor may appeal a contracting officer’s final decision to either (1) the agency board of competent jurisdiction over the claim or (2) the Court of Federal Claims. Pursuant to the CDA, both forums are required to review the CO’s decision de novo.60 This means that neither the CO’s findings of fact nor the CO’s conclusions of law (if any) are entitled to any deference or presumption of correctness.61 The contractor bears the burden of proving the underlying facts of liability and damages. For example, when asserting a claim based on government-caused delay, “the contractor has the burden of proving the extent of the delay, that the delay was proximately caused by government action, and that the delay harmed the contractor.”62 Again, the contractor is free to appeal to either the agency board or the Court of Federal Claims.63 But, the contractor must “elect” one forum in which he or she will file an appeal—he or she cannot file a suit with both the agency board and the Court of Federal Claims.64 This concept is known as the Election Doctrine: when the contractor makes his or her

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decision, he or she relinquishes the rights to pursue an appeal in the other forum.65 Each forum presents a unique set of risks and benefits that should be considered when deciding where to file an appeal of the CO’s final decision, as detailed in the following section.

2.10.8. Election: The Choice of Where to File The CDA limits the government’s options by requiring that “[e]ach claim by the Federal Government against a contractor relating to a contract shall be the subject of a written decision by the contracting officer.”66 The government cannot appeal the CO’s final decision. Because the government cannot appeal a contracting officer’s final decision, only the contractor can initiate the jurisdiction of a board or the Court of Federal Claims.67 The contractor’s election of forum is therefore an important strategic decision.68 The contractor must choose the most advantageous forum—either the appropriate agency board or the Court of Federal Claims—in its initial filing. Each presents different cost considerations, time limitations, and procedures, as illustrated in Table 2-1. Until litigation in a court has commenced, the contracting officer has the authority to settle a dispute throughout the entire administrative appeals process.69 The principal remedy available to contractors is money damages—usually in the form of expectation or reliance damages. The BCA has jurisdiction to grant a limited form of declaratory judgment.70 However, neither the BCA nor the COFC is authorized to grant relief based solely upon equitable considerations.71 They cannot issue injunctive relief, direct specific performance,72 or grant mandamus relief.73 Figure 2-1 summarizes a contractor’s options and the appeals process. Agency Boards of Contract Appeals (BCA or BCAs) Cost-conscious contractors may opt to appeal to an agency board because taking an appeal to a BCA incurs no fee.74 Also, an appeal to a BCA is usually resolved sooner than an appeal to the COFC. The contractor must file an appeal to the BCA within 90 days of receiving the contracting officer’s final decision.75 Additionally, BCAs allow contractors to appear pro se, or unrepresented by an attorney. If a contractor knows the law and feels confident appearing pro se, the contractor can avoid expenses and legal fees. BCAs

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Table 2-1. Factors to Consider When Electing the Venue for Appealing the Contracting Officer’s Final Decision

Filing Deadline Cost to Initiate Appeal Pro Se Representation

Judges’ Qualifications Number of Judges Party Authorized to Settle Owner’s Representative Recovery of Costs and Fees Fraud-Based Counterclaims Court of Next Resort Appealing Decision

Board of Contract Appeals (BCAs)

Court of Federal Claims (COFC)

90 days from receipt of CO’s final decision $0.00 Allowed; contractor does not need an attorney

12 months from receipt of CO’s final decision $350.00 Prohibited for businesses; contractor needs an attorney No public contracts experience needed One judge at bench Department of Justice attorneys DOJ attorneys 28 U.S.C. § 2412 Permitted U.S. Court of Appeals for the Federal Circuit Appeal to the Federal Circuit within 60 days after entry of judgment

5+ years of public contracts experience Three-judge panel Contracting officer (exclusive settlement authority) Agency attorneys 5 U.S.C. § 504 Prohibited U.S. Court of Appeals for the Federal Circuit Appeal to Federal Circuit within 120 days from the date of receipt of a copy of the board’s decision

hold pro se litigants to a lower procedural standard than attorneys but to the same legal standard as attorneys. In other words, BCAs “construe a pro se litigant’s pleadings liberally, holding them to less stringent standards than formal pleadings prepared by an attorney,”76 but this leniency “does not change a pro se litigant’s burden of proof or our weighing of the factual record.”77 The contractor should consult an attorney before deciding to appear pro se to ensure that the contractor understands the challenges and potential pitfalls of appealing pro se. If the contractor elects to appeal to the BCA of appropriate jurisdiction and hires an attorney to handle the appeal, and the contractor is successful in his appeal, he or she may be reimbursed for part of these legal fees under 5 U.S.C. § 504, the Equal Access to Justice Act, that pertains to an agency’s conduction of an “adversary adjudication.”78 Under 5 U.S.C. § 504(a)(1) A party seeking an award of fees and other expenses shall, within thirty days of a final disposition in the adversary adjudication, submit to the agency an application which shows that the party is a prevailing party and is eligible to receive an award under this

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Figure 2-1. Flow Chart: Appealing the CO’s Final Decision.

section, and the amount sought, including an itemized statement from any attorney, agent, or expert witness representing or appearing in behalf of the party stating the actual time expended and the rate at which fees and other expenses were computed.

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The party shall also allege that the position of the agency was not substantially justified.79

To qualify for reimbursement under 5 U.S.C. § 504, the contractor must be a “party” within the design of 5 U.S.C. § 551(3), meaning: “(i) an individual whose net worth did not exceed $ 2,000,000 at the time the adversary adjudication was initiated, or (ii) any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $ 7,000,000 at the time the adversary adjudication was initiated, and which had not more than 500 employees at the time the adversary adjudication was initiated.”80 Qualifying contractors may be entitled to a reimbursement of fees from the agency by submitting an application for fees within 30 days of the BCA’s final disposition on an appeal that states 1) The contractor is a prevailing party; 2) The contractor is a “party” as defined within the limitations of 5 U.S.C. § 551(3), and thus qualifies for reimbursement under 5 U.S.C. § 504; 3) A statement of the total amount sought, together with an “itemized statement” from any attorney, expert witness, or agent appearing on behalf of a party, “stating the actual time expended and the rate at which fees and other expenses were computed”; and 4) An allegation “that the position of the agency was not substantially justified.”81 It should be noted that 5 U.S.C. § 504 is distinguishable from 28 U.S.C. § 2412 of the Equal Access to Justice Act (EAJA), discussed in Chapter 2, because BCAs do not have jurisdiction under 28 U.S.C. § 2412(a)(1)(A) to award attorneys’ fees and litigation costs. The EAJA pertains only to court proceedings, including proceedings before the Court of Federal Claims. Title 5, section 504, by comparison, covers agency proceeds such as appeals to, inter alia, the Armed Services Board of Appeals. Pursuant to 5 U.S.C. § 504, if a qualifying party is successful in its appeal to the BCA, the federal agency shall award to this party the fees and other expenses incurred in connection with that proceeding unless justice requires otherwise. “Fees and other expenses” include attorneys’ fees, which are usually reimbursed up to $125 per hour.82

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If the contractor has a good relationship with the CO or believes an equitable settlement could be reached with the CO, the contractor may opt to appeal to the BCA. For appeals pending before the BCA, the CO retains the sole authority to settle with the contractor.83 And, ordinarily the BCA cannot reject a settlement brokered by the CO.84 This allows the contractor to settle its dispute with the CO (perhaps on more favorable terms) before the BCA issues its ruling. In contrast, the CO has no authority to settle a dispute that is pending before the COFC or the United States Court of Appeals for the Federal Circuit. When an appeal is filed with the COFC, the CO is divested of all authority for the dispute, and attorneys for the U.S. Department of Justice take over the case.85 To summarize, a cash-strapped contractor may prefer to appeal to the agency board, where there is no filing fee and the contractor can appear as a pro se appellant. Details about the appeals procedures and the various boards are included in Appendix 2B. Appealing the CO’s Final Decision to the Court of Federal Claims Alternatively, the contractor may appeal the contracting officer’s final decision directly to the Court of Federal Claims within 12 months from the “date of receipt” of the contracting officer’s decision.86 For the Court of Federal Claims to have jurisdiction over the matter, the contractor must submit a written demand including adequate notice of the basis and amount of a claim and a request for a final decision.87 Aside from the certification requirement, “all that is needed is that the contractor supply in writing to the contracting officer a clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim.”88 Contractors must be aware that counterclaims based on fraud are permitted in the Court of Federal Claims.89 This means that the government may bring counterclaims—such as a violation of the False Claims Act—against the contractor. BCAs lack jurisdiction over counterclaims involving fraud.90 The Court of Federal Claims has further articulated the prerequisites for jurisdiction to include the following elements: (1) a letter to the contracting officer specifying the relief desired, (2) an assertion of specific rights, (3) a request for a final decision from the contracting officer, (4) a final decision of the contracting officer or the failure to issue such a decision within the statutory time periods, and (5) a clear

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indication of the amount of monetary compensation requested.91 Details about the appeals procedures for the COFC are included in Appendix 2C. Similarly to contractors represented by attorneys on appeal to a BCA, qualifying contractors who prevail in their appeal to the Court of Federal Claims can file a request for reimbursement of legal fees, and the contractor may be reimbursed for part or some of these legal fees under 28 U.S.C. § 2412 et seq., the EAJA.92 The EAJA pertains only to court proceedings; agency proceedings, including those before a BCA, are covered by the Administrative Procedure Act, 5 U.S.C. § 504.93 Qualifying contractors are entitled to a reimbursement of fees “absent a showing by the Government that its position in the underlying litigation ‘was substantially justified.’”94 For the contractor to fulfill this requirement, it must allege that the position of the government was not substantially justified. The contractor must file a fee application within 30 days after final judgment to be eligible for reimbursement.95 As aforementioned, the qualifying contractor must allege in the fee application that the government’s position was not substantially justified, and the application shall [additionally] include: 1. A showing that the applicant is a prevailing party; 2. A showing that the applicant is eligible to receive an award of fees; and 3. A statement of the amount sought together with an itemized account of time expended and rates charged.96 For item number two, “a showing that the applicant is eligible to receive an award of fees,” the contractor must meet the threshold requirement of having a net worth not in excess of (i) $7,000,000 for any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization; or (ii) $2,000,000 at the time the action was filed for an individual.97 The applicant for EAJA fees bears the burden of proving the reasonableness of the attorney fees requested, both the number of hours and the hourly rate charged by the attorney.98 Attorney fees shall not be awarded in excess of $125.00 per hour unless the court determines that some special factor, such as an increase in cost of living, justifies a higher fee.99

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2.11. Appeal of a BCA or COFC Decision to the United States Court of Appeals for the Federal Circuit A contractor can appeal an adverse decision of either the BCA or the COFC to the United States Court of Appeals for the Federal Circuit. The Federal Circuit Court is the appellate authority for both forums. The Court of Appeals for the Federal Circuit has exclusive jurisdiction over (1) an appeal of a final decision of an agency board of contract appeals100 and (2) an appeal from a final decision of the Court of Federal Claims.101 Contractors for the Tennessee Valley Authority (TVA) should note that appeals of TVA decisions are made to a United States District Court of competent jurisdiction rather than to the Court of Appeals for the Federal Circuit.102

2.11.1. Appealing a Board Decision to the Federal Circuit A contractor has 120 days to appeal a BCA decision to the United States Court of Appeals for the Federal Circuit.103 This entails completing the Federal Circuit’s Form 5, “Petition for Review or Appeal of an Order or Decision of an Agency, Board, Commission, or Officer”104 and complying with all other rules imposed by the Federal Circuit.105 This court exercises de novo review of the board’s decisions on questions of law.106 Generally, the agency’s factual findings are final and conclusive. The Federal Circuit will not set aside a BCA decision on a question of fact “unless the decision is fraudulent, arbitrary or capricious; so grossly erroneous as to necessarily imply bad faith; or not supported by substantial evidence.”107 This is known as a “clearly erroneous” standard of review for findings of fact.108 Note that the Federal Circuit has frequently stated that it defers somewhat to the board’s expertise in contractual interpretation.109 This is particularly true for disputes concerning interpretation of the Federal Acquisition Regulation; the Federal Circuit has stated that due respect is often warranted by the board’s expertise in interpreting the FAR.

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2.11.2. Appealing a Court of Federal Claims Decision to the Federal Circuit Parties can appeal a final decision of the Court of Federal Claims to the United States Court of Appeals for the Federal Circuit.110 But such appeals to the Federal Circuit are rare because they are subject to heightened judicial scrutiny, as discussed earlier in this chapter. The Federal Circuit appeals options are described in further detail in Appendix 2D.

2.12. Alternative Dispute Resolution and Federal Construction Contracts Since the promulgation of the Alternative Dispute Resolution Act in 1998, 28 U.S.C. § 651 et seq., alternative dispute resolution (ADR) is an increasingly common means of resolving public contract disputes, particularly at the federal level. The Act contains a broad definition of ADR as a proceeding in which a “neutral third party participates to assist in the resolution of issues in controversy, through processes such as early neutral evaluation, mediation, minitrial, and arbitration.”111 Above all else, ADR is a voluntary process: initiation of an ADR proceeding requires mutual assent of the parties, and neither side is obligated to choose it. However, the benefits are many and the disadvantages few. Regardless of where you file your appeal, you will have an opportunity to suggest ADR. You should consider your ADR options seriously as you proceed in resolving your claim. Refer to Appendix 2E for a general introduction to ADR and an overview of ADR procedures commonly used in venues such as the Armed Services Board of Contract Appeals (ASBCA), Civilian Board of Contract Appeals (CBCA), and the Court of Federal Claims.

2.13. Conclusion The contractor must be aware of claims and change order situations, be fully conversant with—and appreciative of—contract specifications, give prompt notice of potential problems, and maintain a good set of records. Negotiation of claims is always preferred, but awareness of appeals and

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dispute resolution options are also important components of a successful claims strategy. With this foundation, the “claims-conscious” contractor will possess the basic elements of a solid claims management program.

Appendix 2A: EJCDC C-700 Standard General Conditions of the Construction Contract, Articles 11 and 12 Note: Articles 11 and 12 are reproduced here with permission from the Engineers Joint Contract Documents Committee. For more information about the EJCDC, please visit www.nspe.org. ARTICLE 11 – AMENDING THE CONTRACT DOCUMENTS; CHANGES IN THE WORK 11.01 Amending and Supplementing Contract Documents A. The Contract Documents may be amended or supplemented by a Change Order, a Work Change Directive, or a Field Order. 1. Change Orders: a. If an amendment or supplement to the Contract Documents includes a change in the Contract Price or the Contract Times, such amendment or supplement must be set forth in a Change Order. A Change Order also may be used to establish amendments and supplements of the Contract Documents that do not affect the Contract Price or Contract Times. b. Owner and Contractor may amend those terms and conditions of the Contract Documents that do not involve (1) the performance or acceptability of the Work, (2) the design (as set forth in the Drawings, Specifications, or otherwise), or (3) other engineering or technical matters, without the recommendation of the Engineer. Such an amendment shall be set forth in a Change Order. 2. Work Change Directives: A Work Change Directive will not change the Contract Price or the Contract Times but is evidence that the parties expect that the modification ordered or documented by a Work Change Directive will be incorporated in a subsequently issued Change Order, following negotiations by the parties as to the Work Change Directive’s effect, if any, on the Contract Price and Contract Times; or, if negotiations are

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unsuccessful, by a determination under the terms of the Contract Documents governing adjustments, expressly including Paragraph 11.04 regarding change of Contract Price. Contractor must submit any Change Proposal seeking an adjustment of the Contract Price or the Contract Times, or both, no later than 30 days after the completion of the Work set out in the Work Change Directive. Owner must submit any Claim seeking an adjustment of the Contract Price or the Contract Times, or both, no later than 60 days after issuance of the Work Change Directive. 3. Field Orders: Engineer may authorize minor changes in the Work if the changes do not involve an adjustment in the Contract Price or the Contract Times and are compatible with the design concept of the completed Project as a functioning whole as indicated by the Contract Documents. Such changes will be accomplished by a Field Order and will be binding on Owner and also on Contractor, which shall perform the Work involved promptly. If Contractor believes that a Field Order justifies an adjustment in the Contract Price or Contract Times, or both, then before proceeding with the Work at issue, Contractor shall submit a Change Proposal as provided herein. 11.02 Owner-Authorized Changes in the Work A. Without invalidating the Contract and without notice to any surety, Owner may, at any time or from time to time, order additions, deletions, or revisions in the Work. Such changes shall be supported by Engineer’s recommendation, to the extent the change involves the design (as set forth in the Drawings, Specifications, or otherwise), or other engineering or technical matters. Such changes may be accomplished by a Change Order, if Owner and Contractor have agreed as to the effect, if any, of the changes on Contract Times or Contract Price; or by a Work Change Directive. Upon receipt of any such document, Contractor shall promptly proceed with the Work involved; or, in the case of a deletion in the Work, promptly cease construction activities with respect to such deleted Work. Added or revised Work shall be performed under the applicable conditions of the Contract Documents. Nothing in this paragraph shall obligate Contractor to undertake work that Contractor reasonably concludes cannot be performed in a manner consistent with Contractor’s safety obligations under the Contract Documents or Laws and Regulations.

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11.03 Unauthorized Changes in the Work A. Contractor shall not be entitled to an increase in the Contract Price or an extension of the Contract Times with respect to any work performed that is not required by the Contract Documents, as amended, modified, or supplemented, except in the case of an emergency as provided in Paragraph 7.15 or in the case of uncovering Work as provided in Paragraph 14.05. 11.04 Change of Contract Price A. The Contract Price may only be changed by a Change Order. Any Change Proposal for an adjustment in the Contract Price shall comply with the provisions of Paragraph 11.06. Any Claim for an adjustment of Contract Price shall comply with the provisions of Article 12. B. An adjustment in the Contract Price will be determined as follows: 1. where the Work involved is covered by unit prices contained in the Contract Documents, then by application of such unit prices to the quantities of the items involved (subject to the provisions of Paragraph 13.03); or 2. where the Work involved is not covered by unit prices contained in the Contract Documents, then by a mutually agreed lump sum (which may include an allowance for overhead and profit not necessarily in accordance with Paragraph 11.04.C.2); or 3. where the Work involved is not covered by unit prices contained in the Contract Documents and the parties do not reach mutual agreement to a lump sum, then on the basis of the Cost of the Work (determined as provided in Paragraph 13.01) plus a Contractor’s fee for overhead and profit (determined as provided in Paragraph 11.04.C). C. Contractor’s Fee: When applicable, the Contractor’s fee for overhead and profit shall be determined as follows: 1. a mutually acceptable fixed fee; or 2. if a fixed fee is not agreed upon, then a fee based on the following percentages of the various portions of the Cost of the Work: a. for costs incurred under Paragraphs 13.01.B.1 and 13.01.B.2, the Contractor’s fee shall be 15 percent; b. for costs incurred under Paragraph 13.01.B.3, the Contractor’s fee shall be five percent; c. where one or more tiers of subcontracts are on the basis of Cost of the Work plus a fee and no fixed fee is agreed upon, the

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intent of Paragraphs 11.04.C.2.a and 11.04.C.2.b is that the Contractor’s fee shall be based on: (1) a fee of 15 percent of the costs incurred under Paragraphs 13.01.A.1 and 13.01.A.2 by the Subcontractor that actually performs the Work, at whatever tier, and (2) with respect to Contractor itself and to any Subcontractors of a tier higher than that of the Subcontractor that actually performs the Work, a fee of five percent of the amount (fee plus underlying costs incurred) attributable to the next lower tier Subcontractor; provided, however, that for any such subcontracted work the maximum total fee to be paid by Owner shall be no greater than 27 percent of the costs incurred by the Subcontractor that actually performs the work; d. no fee shall be payable on the basis of costs itemized under Paragraphs 13.01.B.4, 13.01.B.5, and 13.01.C; e. the amount of credit to be allowed by Contractor to Owner for any change which results in a net decrease in cost will be the amount of the actual net decrease in cost plus a deduction in Contractor’s fee by an amount equal to five percent of such net decrease; and f. when both additions and credits are involved in any one change, the adjustment in Contractor’s fee shall be computed on the basis of the net change in accordance with Paragraphs 11.04.C.2.a through 11.04.C.2.e, inclusive. 11.05 Change of Contract Times A. The Contract Times may only be changed by a Change Order. Any Change Proposal for an adjustment in the Contract Times shall comply with the provisions of Paragraph 11.06. Any Claim for an adjustment in the Contract Times shall comply with the provisions of Article 12. B. An adjustment of the Contract Times shall be subject to the limitations set forth in Paragraph 4.05, concerning delays in Contractor’s progress. 11.06 Change Proposals A. Contractor shall submit a Change Proposal to Engineer to request an adjustment in the Contract Times or Contract Price; appeal an initial decision by Engineer concerning the requirements of the Contract Documents or relating to the acceptability of the Work under the Contract Documents; contest a set-off against payment

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due; or seek other relief under the Contract. The Change Proposal shall specify any proposed change in Contract Times or Contract Price, or both, or other proposed relief, and explain the reason for the proposed change, with citations to any governing or applicable provisions of the Contract Documents. 1. Procedures: Contractor shall submit each Change Proposal to Engineer promptly (but in no event later than 30 days) after the start of the event giving rise thereto, or after such initial decision. The Contractor shall submit supporting data, including the proposed change in Contract Price or Contract Time (if any), to the Engineer and Owner within 15 days after the submittal of the Change Proposal. The supporting data shall be accompanied by a written statement that the supporting data are accurate and complete, and that any requested time or price adjustment is the entire adjustment to which Contractor believes it is entitled as a result of said event. Engineer will advise Owner regarding the Change Proposal, and consider any comments or response from Owner regarding the Change Proposal. 2. Engineer’s Action: Engineer will review each Change Proposal and, within 30 days after receipt of the Contractor’s supporting data, either deny the Change Proposal in whole, approve it in whole, or deny it in part and approve it in part. Such actions shall be in writing, with a copy provided to Owner and Contractor. If Engineer does not take action on the Change Proposal within 30 days, then either Owner or Contractor may at any time thereafter submit a letter to the other party indicating that as a result of Engineer’s inaction the Change Proposal is deemed denied, thereby commencing the time for appeal of the denial under Article 12. 3. Binding Decision: Engineer’s decision will be final and binding upon Owner and Contractor, unless Owner or Contractor appeals the decision by filing a Claim under Article 12. B. Resolution of Certain Change Proposals: If the Change Proposal does not involve the design (as set forth in the Drawings, Specifications, or otherwise), the acceptability of the Work, or other engineering or technical matters, then Engineer will notify the parties that the Engineer is unable to resolve the Change Proposal. For purposes of further resolution of such a Change Proposal, such notice shall be deemed a denial, and Contractor may choose to seek resolution under the terms of Article 12.

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11.07 Execution of Change Orders A. Owner and Contractor shall execute appropriate Change Orders covering: 1. changes in the Contract Price or Contract Times which are agreed to by the parties, including any undisputed sum or amount of time for Work actually performed in accordance with a Work Change Directive; 2. changes in Contract Price resulting from an Owner set-off, unless Contractor has duly contested such set-off; 3. changes in the Work which are: (a) ordered by Owner pursuant to Paragraph 11.02, (b) required because of Owner’s acceptance of defective Work under Paragraph 14.04 or Owner’s correction of defective Work under Paragraph 14.07, or (c) agreed to by the parties, subject to the need for Engineer’s recommendation if the change in the Work involves the design (as set forth in the Drawings, Specifications, or otherwise), or other engineering or technical matters; and 4. changes in the Contract Price or Contract Times, or other changes, which embody the substance of any final and binding results under Paragraph 11.06, or Article 12. B. If Owner or Contractor refuses to execute a Change Order that is required to be executed under the terms of this Paragraph 11.07, it shall be deemed to be of full force and effect, as if fully executed. 11.08 Notification to Surety A. If the provisions of any bond require notice to be given to a surety of any change affecting the general scope of the Work or the provisions of the Contract Documents (including, but not limited to, Contract Price or Contract Times), the giving of any such notice will be Contractor’s responsibility. The amount of each applicable bond will be adjusted to reflect the effect of any such change. ARTICLE 12 – CLAIMS 12.01 Claims A. Claims Process: The following disputes between Owner and Contractor shall be submitted to the Claims process set forth in this Article: 1. Appeals by Owner or Contractor of Engineer’s decisions regarding Change Proposals;

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2. Owner demands for adjustments in the Contract Price or Contract Times, or other relief under the Contract Documents; and 3. Disputes that Engineer has been unable to address because they do not involve the design (as set forth in the Drawings, Specifications, or otherwise), the acceptability of the Work, or other engineering or technical matters. B. Submittal of Claim: The party submitting a Claim shall deliver it directly to the other party to the Contract promptly (but in no event later than 30 days) after the start of the event giving rise thereto; in the case of appeals regarding Change Proposals within 30 days of the decision under appeal. The party submitting the Claim shall also furnish a copy to the Engineer, for its information only. The responsibility to substantiate a Claim shall rest with the party making the Claim. In the case of a Claim by Contractor seeking an increase in the Contract Times or Contract Price, or both, Contractor shall certify that the Claim is made in good faith, that the supporting data are accurate and complete, and that to the best of Contractor’s knowledge and belief the amount of time or money requested accurately reflects the full amount to which Contractor is entitled. C. Review and Resolution: The party receiving a Claim shall review it thoroughly, giving full consideration to its merits. The two parties shall seek to resolve the Claim through the exchange of information and direct negotiations. The parties may extend the time for resolving the Claim by mutual agreement. All actions taken on a Claim shall be stated in writing and submitted to the other party, with a copy to Engineer. D. Mediation: 1. At any time after initiation of a Claim, Owner and Contractor may mutually agree to mediation of the underlying dispute. The agreement to mediate shall stay the Claim submittal and response process. 2. If Owner and Contractor agree to mediation, then after 60 days from such agreement, either Owner or Contractor may unilaterally terminate the mediation process, and the Claim submittal and decision process shall resume as of the date of the termination. If the mediation proceeds but is unsuccessful in resolving the dispute, the Claim submittal and decision process shall resume as of the date of the conclusion of the mediation, as determined by the mediator.

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3. Owner and Contractor shall each pay one-half of the mediator’s fees and costs. E. Partial Approval: If the party receiving a Claim approves the Claim in part and denies it in part, such action shall be final and binding unless within 30 days of such action the other party invokes the procedure set forth in Article 17 for final resolution of disputes. F. Denial of Claim: If efforts to resolve a Claim are not successful, the party receiving the Claim may deny it by giving written notice of denial to the other party. If the receiving party does not take action on the Claim within 90 days, then either Owner or Contractor may at any time thereafter submit a letter to the other party indicating that as a result of the inaction, the Claim is deemed denied, thereby commencing the time for appeal of the denial. A denial of the Claim shall be final and binding unless within 30 days of the denial the other party invokes the procedure set forth in Article 17 for the final resolution of disputes. G. Final and Binding Results: If the parties reach a mutual agreement regarding a Claim, whether through approval of the Claim, direct negotiations, mediation, or otherwise; or if a Claim is approved in part and denied in part, or denied in full, and such actions become final and binding; then the results of the agreement or action on the Claim shall be incorporated in a Change Order to the extent they affect the Contract, including the Work, the Contract Times, or the Contract Price.

Appendix 2B: Appealing the CO’s Final Decision to the Agency Board of Contract Appeals 2B.1. Notice Requirements and Filing Deadlines Once a final decision has been issued, the contractor may appeal the decision to the agency board with jurisdiction over the contract112 within 90 days of the decision (or 60 days from the request if no decision is rendered).113 Because each board has its own set of rules, the contractor must consult the rules of the BCA with jurisdiction over his or her contract to ensure compliance with the board’s requirements. This chapter summarizes the procedures BCAs generally use, but it is not

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a substitute for the rules of BCAs and it does not constitute legal advice on these procedures. The contractor must give notice of the company’s intent to appeal to a BCA. The contractor should file the written notice of appeal with the appropriate BCA and provide a copy to the CO. The written notice of appeal, prepared by the contractor or the contractor’s attorney, should 1. State that the contractor is appealing a CO’s final decision; 2. Identify the contract by number and indicate the date of its award, the type of services rendered or commodities procured pursuant to the contract, and the name of the agency or unit administering the contract; 3. State the amount of money in dispute and the relief sought; 4. Briefly describe the circumstances giving rise to the dispute; 5. Provide the CO’s name, address, telephone number, fax number, and e-mail address; and 6. Include a copy of the CO’s final decision denying the contractor’s claim.114 To ensure that the contractor is complying with the specific requirements of each board, the contractor must consult the rules of the appropriate BCA to determine the applicable notice requirements.115 Generally, if the appeal is sent to the board by mail, the postmarked date of mailing constitutes the filing date. If the appeal is sent to the board by any other means, the date of the board’s actual receipt of the notice is the filing date.116 As aforementioned, the information contained in this chapter does not constitute legal advice, and contractors are advised to consult an attorney regarding, inter alia, the requirements for appealing a CO’s final decision to the BCA of competent jurisdiction.

2B.2. The Six Boards of Contract Appeals The six boards of contract appeals are (1) the Armed Services Board of Contract Appeals (ASBCA), (2) the Civilian Board of Contract Appeals (CBCA), (3) the Board of Contract Appeals of the Tennessee Valley Authority, (4) the Postal Service Board of Contract Appeals, (5) the Government Accountability Office Contract Appeals Board, and (6) the Office of Dispute Resolution for Acquisition.

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The two main BCAs are ASBCA and CBCA. ASBCA is the board of competent jurisdiction for contracts with the U.S. Department of Defense, Department of the Navy, Department of the Army, and Department of the Air Force.117 CBCA was created in 2007, consolidating jurisdiction over eight previously independent boards of contract appeals.118 The other boards are the Office of Dispute Resolution for Acquisition (ODRA), which handles disputes arising from Federal Aviation Administration procurements; the Government Accountability Office Contract Appeals Board (GAOCAB), which hears contract disputes arising in the legislative branch; the Board of Contract Appeals of the Tennessee Valley Authority (TVA),119 which entertains TVA contract disputes; and the Postal Service Board of Contract Appeals (PSCBA), presiding over contract disputes in the United States Postal Service and the Postal Regulatory Commission.120

2B.3. Accelerated Appeals and Small Claims Procedures For disputes of $100,000 or less, the contractor can elect an accelerated appeals procedure.121 The accelerated procedure is invoked solely by the contractor. Under federal law, an agency board shall resolve, whenever possible, a dispute submitted for resolution under the accelerated procedure within 180 days from the date the contractor elects to use the procedure.122 When the contractor’s claim is for $50,000 or less, the contractor may opt to follow the small claims procedure, whereby the board must resolve the dispute within 120 days of the date of filing (whenever possible).123 The small claims procedure is friendlier to contractors proceeding pro se, or without an attorney, as the small claims procedure follows a simplified set of procedural rules and a single member of the agency board can render a decision.124 Decisions reached by BCA in both the accelerated and small claims procedures are final. Contractors cannot appeal the decision to the United States Court of Appeals for the Federal Circuit. The only exception is in cases of fraud.125

2B.4. Benefits of Appealing to the BCAs Unlike judges for the Court of Federal Claims, agency board judges must have five years of experience in public contract law to be appointed.126 Judges with the Court of Federal Claims have no such requirement.127

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Therefore, a BCA judge may be better suited to hear complicated or highly technical claims involving matters of public contract interpretation and the legal framework for federal procurement.

2B.5. Finality of the BCA’s Decision Contractors should remember that for claims in excess of $100,000, the BCA is not required to issue its decision in any specific amount of time. The BCA issues reports that reflect mean time of decision rendering. For claims in excess of $100,000, the contractor should seriously consider pursuing the BCAs’ alternative dispute resolution procedures, which would yield a more timely resolution. The contractor may appeal the BCA’s decision to the United States Court of Appeals for the Federal Circuit within 120 days from the date of the contractor’s receipt of a copy of the BCA’s decision.128 With few exceptions, the board’s decision is final and conclusive on questions of fact. The decision of the agency board on a question of law, however, is neither final nor conclusive.129

Appendix 2C: Appealing the CO’s Final Decision to the Court of Federal Claims The contractor has 12 months130 to file an appeal with the COFC. If the contractor cannot pursue a BCA appeal within 90 days, his or her right to an appeal is preserved through the COFC’s 365-day filing deadline. Contractors making complicated or highly technical claims may benefit from the COFC’s 275 additional days before the filing deadline. The additional time allows contractors to retain expert witnesses and commission expert reports on key issues, such as scheduling and CPM analysis when the claim involves disruption or acceleration. A contractor may choose to appeal to the COFC to delay incurring costs associated with investigating the circumstances of the appeal, researching the legal grounds for the appeal, and drafting the pleadings necessary to sustain the appeal.131 Cash-strapped contractors may fare worse before the COFC because of the fee to file a complaint and the costs of hiring an attorney to represent the contractor in its appeal to the COFC. The contractor must pay substantial fees when appealing to the Court of Federal Claims. As

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of December 1, 2013, the fee to file a complaint is $350.00.132 Furthermore, contractors must be represented by an attorney to file an appeal to the COFC. Rule 83.1(3) of the Court of Federal Claims provides that “an individual who is not an attorney may represent oneself or a member of one’s immediate family, but may not represent a corporation, an entity, or any other person in any proceeding before this court.”133 Assuming that the contractor is a business entity, the contractor is prohibited from appearing pro se before the COFC, meaning the contractor must hire an attorney to represent the contractor in its appeal to the COFC.134 Construction law, specifically federal construction law, is a very specialized field area that most attorneys do not practice. In the arena of public contracting, contractors are well-advised to solicit the guidance of an attorney with experience in representing federal contractors when determining how to advance a claim against a federal agency. Although certain qualifying contractors may obtain limited relief for attorneys’ fees pursuant to the Equal Access to Justice Act—which offers successful appellants limited recovery of attorneys’ fees in federal contract disputes before the Court of Federal Claims135—the Act usually does not offer the contractor full reimbursement of attorneys’ fees.d Ultimately, the contractor should select a forum after considering the circumstances giving rise to the claim(s) and the contractor’s long- and short-term objectives and priorities. Regardless of the contractor’s choice of forum, the contractor may appeal an adverse decision to the United States Court of Appeals for the Federal Circuit, as described in Appendix 2D.

Appendix 2D: Appealing a BCA Decision or Court of Federal Claims Judgment to the Federal Circuit The court of next resort for appeals from both BCAs and the COFC is the United States Circuit Court for the Federal Circuit. However, appeals to the Federal Circuit are rare because they are subject to heightened judicial scrutiny, as discussed next in this chapter. Appealing a BCA final decision to the Federal Circuit: Contractors may appeal a BCA decision to the United States Court of Appeals for the

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Federal Circuit within 120 days from the date the contractor receives a copy of the BCA decision.136 When BCA final decisions are reviewed by the Federal Circuit, “the decision of the agency board on a question of law is not final or conclusive,” but “the decision of the agency board on a question of fact is final and conclusive and may not be set aside unless the decision is—(A) fraudulent, arbitrary, or capricious; (B) so grossly erroneous as to necessarily imply bad faith; or (C) not supported by substantial evidence.”137 Appealing a COFC final decision to the Federal Circuit: Parties can appeal a final decision of the Court of Federal Claims to the United States Court of Appeals for the Federal Circuit within 60 days after receipt of the judgment from the Court of Federal Claims.138 When considering an appeal from the COFC, the Federal Circuit “reviews legal conclusions of the Court of Federal Claims without deference and its findings of fact for clear error.”139 General procedural notes for appeals to the Federal Circuit: Contractors should consult the Federal Circuit’s rules to ensure compliance with the court’s notification and filing requirements, which include but are not limited to the filing of Federal Circuit Form 2, “Notice of Appeal to the United States Court of Appeals for the Federal Circuit from a Judgment or Order of the United States Court of Federal Claims”140 and—when appearing as a pro se appellant—an informal brief.141 There is a $500.00 docketing fee payable to the Federal Circuit and a fee for filing a notice of appeal with the Court of Federal Claims.142 Finality of decisions rendered by the Court of Appeals for the Federal Circuit: If the contractor is successful before the Court of Appeals for the Federal Circuit, the court will either issue a decision in the contractor’s favor or reverse the BCA’s decision and remand it to the BCA for further proceedings consistent with the court’s ruling.143 If, however, the Court of Appeals for the Federal Circuit rules in the government’s favor, the contractor has realistically exhausted his or her practical judicial remedies and the court’s decision will be the final, binding decision on the matter. The Supreme Court of the United States has appellate jurisdiction over the Federal Circuit, so the contractor may appeal an adverse decision to the Supreme Court by petitioning for a writ of certiorari. As a practical matter, however, the decision of the Federal Circuit terminates litigation of the claim because a contractor may not seek review by the Supreme Court as a matter of right. It is highly unlikely

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that the Court would grant certiorari, or “cert”, over a dispute involving a federal construction contract as such disputes do not usually present the legal issues over which the Supreme Court exercises its discretionary jurisdiction. A petition for a writ of certiorari is granted “only for compelling reasons,” and it is “rarely granted when the asserted error consists of erroneous factual findings or the misapplication of a properly stated rule of law,”144 In a CDA dispute, misapplication of the law or erroneous factual findings are the usual types of errors alleged in a contractor’s appeal. Most petitions filed on a contractor’s behalf will allege that the appellate court reached erroneous factual conclusions or misapplied a rule of law, so, practically speaking, the Court of Appeals for the Federal Circuit is typically the court of last resort for a CDA claim.

Appendix 2E: Alternative Dispute Resolution in the Boards of Contract Appeals, Court of Federal Claims, and Federal Circuit Court Since the promulgation of the Alternative Dispute Resolution Act in 1998, 28 U.S.C. § 651 et seq., alternative dispute resolution (ADR) has become an increasingly common means of resolving public contract disputes, particularly at the federal level. The Act contains a broad definition of ADR as a proceeding in which a “neutral third party participates to assist in the resolution of issues in controversy, through processes such as early neutral evaluation, mediation, minitrial, and arbitration.”145 Above all else, ADR is a voluntary process; initiation of an ADR proceeding requires mutual assent of the parties, and neither side is obligated to choose it. But the benefits are many and the disadvantages few. Regardless of where you file your appeal, you will have an opportunity to suggest ADR. You should consider your ADR options seriously as you proceed in resolving your claim. This section serves as a general introduction to ADR and an overview of ADR procedures commonly used in venues such as the ASBCA, CBCA, and the Court of Federal Claims.

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2E.1. Overview of ADR Boards of contract appeals are encouraged to utilize ADR techniques. The CDA states that boards of contract appeals “shall. . . to the fullest extent practicable provide informal, expeditious, and inexpensive resolution of disputes.”146 Furthermore, “the objective of using ADR procedures is to increase the opportunity for relatively inexpensive and expeditious resolution of issues in controversy.”147 In practice, this mandate has led to extensive use of ADR processes by the boards of contract appeals because ADR streamlines the dispute resolution process, making it faster, more flexible, more affordable, and friendlier to pro se litigants. ADR’s chief benefits are (1) streamlined resolution process, (2) increased efficiency, (3) reduced costs, and (4) greater flexibility. A contractor’s participation in ADR does not lessen his or her chances of recovery. The risks are minimal because most forums allow parties to proceed with conventional litigation if ADR fails.148 But in most cases, ADR is successful.149 Note that current procedural rules of the BCAs and the COFC, as well as federal legislation, protect the confidentiality of ADR proceedings,150 further mitigating the risk involved in undertaking ADR in lieu of conventional litigation. Generally, at the outset of ADR, both parties and their attorneys enter into a confidentiality agreement prohibiting either side from disclosing information or documents obtained during the ADR process. 151

2E.2. Filing Requirements If the contracting officer has issued a final decision, the contracting officer who rejects a contractor’s request for an ADR proceeding must provide the contractor with a written explanation providing specific reasons why ADR procedures are inappropriate.152 The Administrative Disputes Resolution Act, 5 U.S.C. §§ 572(b)(1)-(6) enumerates six situations where an agency “shall not” consider using a dispute resolution proceeding. Among these are the need for binding resolution of a matter of precedential value and resolution of a matter that is in the public interest, or of public importance, for which a full public record of the proceeding is important.153 The Federal Acquisition Regulation identifies four elements as “essential” to ADR: (1) existence of an issue in controversy, (2) a

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voluntary election by both parties to participate in the ADR process, (3) an agreement on alternative procedures and terms to be used in lieu of formal litigation, and (4) participation in the process by officials of both parties who have the authority to resolve the issue in controversy.154 These four elements are commonly considered to be the distinguishing characteristics of ADR methods in all judicial and administrative forums. Judge Paul Williams, Chair of the Armed Services Board of Contract Appeals, has written a comprehensive article with Judge Reba Ann Page regarding the workings and success of ADR in the ASBCA published in the American Bar Association’s public contract law journal, The Procurement Lawyer.155 The parties may invoke the ADR process at any stage of a dispute—before or after a final decision has been rendered. And the parties may invoke the ADR process in situations of agency disputes where the ASBCA is not the nominated BCA to handle CDA disputes.

2E.3. ADR Processes The two basic kinds of ADR are binding and nonbinding, but individual BCAs have their own variations on both. In a binding ADR proceeding, such as a summary trial with binding decision, the parties must agree that the proceeding’s decisions, rulings, and orders are final, conclusive, and nonappealable except in cases of fraud. In comparison, nonbinding ADR is an evaluative, advisory, and settlement tool. One technique is an advisory. Here, the judge would issue an opinion on the likely conclusion on the facts and law after (1) overseeing a series of hearings in which the parties present their positions and (2) evaluating the parties’ supporting briefs and other written memoranda. The neutral’s evaluation is purely advisory; the parties are not bound by the neutral’s findings. Mediation is the most common form of nonbinding ADR and is useful when the parties’ negotiation has stalemated. If a nonbinding ADR procedure fails, the matter is usually returned to the board for further litigation. Parties can either use the default ADR provisions provided by BCAs or agree to operate under their own agreed-upon ADR framework. Some boards require the parties to obtain board approval of the parties’ proposed ADR agreement. The Armed Services Board of Contract Appeals, for example, asks the parties to draft an ADR agreement that addresses several factors, including “(1) the scope of matters to be

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addressed, (2) the ADR procedures to be followed and whether the proceeding will be binding or nonbinding, (3) how limited discovery will take place, (4) the submission of position papers, and (5) a schedule and agenda for the proceedings.”156

2E.4. Board of Contract Appeals’ Use of Different ADR Techniques Since the promulgation of the Administrative Dispute Resolution Act of 1996, ADR has become an increasingly effective tool for resolving contract claims. It legitimized myriad forms of alternative dispute resolution, defining a “dispute resolution proceeding” as “any process in which an alternative means of dispute resolution is used to resolve an issue in controversy in which a neutral is appointed and specified parties participate.”157 According to the Act, alternative means of dispute resolution include “any procedure that is used to resolve issues in controversy, including, but not limited to, conciliation, facilitation, mediation, factfinding, minitrials, arbitration, and use of ombuds, or any combination thereof.”158 ADR processes can be initiated at any stage of the claims process, which adds to its flexibility. Notably, it “may be used at any stage of contract disagreement, consistent with the CDA’s progression of encouraging resolution beginning at the lowest possible level and encompassing disputes, claims, and appeals.”159 From this broad framework, individual agencies have institutionalized their own ADR processes. Although each agency board has adopted specific enumerated ADR processes, each board also provides for pliability in the parties’ ADR agreements. This flexibility of form arose, in part, because the ADR Act’s amendments to the CDA allowed contracting officers and contractors “to use any ADR procedure set forth in the ADR Act or other mutually agreeable procedures to resolve a claim certified by the contractor.”160 Armed Services Board of Contract Appeals The ASBCA recognizes three principal ADR methods: (1) mediation, (2) minitrial and (3) summary proceeding with binding decision.161 Mediation is nonbinding. Today, the minitrial is rarely used, but when it is, it usually operates in conjunction with other nonbinding procedure(s).

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In a minitrial, the ASBCA appoints a judge as a neutral who works with and provides guidance to authorized representatives of both parties in hopes of reaching a compromise.162 Here is the ASBCA’s description of its two main ADR procedures: 1. Mediations. A Neutral is an Administrative Judge who will not normally hear or have any formal or informal decision-making authority in the matter and who is appointed for the purpose of facilitating settlement. In many circumstances, settlement can be fostered by a frank, in-depth discussion of the strengths and weaknesses of each party’s position with the Neutral. The agenda for meetings with the Neutral will be flexible to accommodate the requirements of the case. To further the settlement effort, the Neutral may meet with the parties either jointly or individually. A Neutral’s recommendations are not binding on the parties. When this method is selected, the ADR agreement must contain a provision in which the parties and counsel agree not to subpoena the Neutral in any legal action or administrative proceeding of any kind to produce any notes or documents related to the ADR proceeding or to testify concerning any such notes or documents or concerning his/her thoughts or impressions. 2. Summary Proceeding With Binding Decision. A summary proceeding with binding decision is a procedure whereby the resolution of the appeal is expedited and the parties try their appeal informally before an Administrative Judge. A binding “bench” decision may be issued upon conclusion of the proceeding, or a binding summary written decision will be issued by the judge no later than ten days following the later of conclusion of the proceeding or receipt of a transcript. The parties must agree in the ADR agreement that all decisions, rulings, and orders by the Board under this method shall be final, conclusive, not appealable and may not be set aside, except for fraud. All such decisions, rulings, and orders will have no precedential value. Pre-hearing, hearing, and post-hearing procedures and rules applicable to appeals generally will be modified or eliminated to expedite resolution of the appeal.163 Civilian Board of Contract Appeals In comparison, the CBCA identifies five main ADR techniques: (1) facilitative mediation, (2) evaluative mediation, (3) minitrial, (4) nonbinding

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advisory opinion, and (5) summary binding decision. The CBCA describes these five techniques as follows: 1. Facilitative Mediation. Normally, mediations begin with a joint session, with the parties making informal presentations to one another and the ADR Neutral regarding the facts and circumstances giving rise to the issues in controversy as well as an explanation of their respective legal positions. The ADR Neutral, as mediator, aids the parties in settling their case, frequently by meeting with each party separately in confidential sessions, engaging in private discussions for the purpose of facilitating the formulation and transmission of settlement offers. 2. Evaluative Mediation. In addition to engaging in facilitative mediation, as described above, if authorized under the terms of the parties’ ADR Agreement, the ADR Neutral, as mediator, may also discuss informally with the parties, either jointly or in private sessions, the strengths and weaknesses of their respective positions. 3. Minitrial. A minitrial is a somewhat more formal procedure in which the parties make abbreviated presentations to an ADR Neutral who sits with the parties’ designated principal representatives as a minitrial panel to hear and evaluate evidence relating to an issue in controversy. The Neutral may thereafter meet with the principal representatives to attempt to mediate a settlement. The minitrial process may also be a prelude to the Neutral’s provision of a nonbinding advisory opinion or to the Neutral’s rendering a binding decision. 4. Nonbinding Advisory Opinion. The parties present to the ADR Neutral information on which the Neutral bases a nonbinding, advisory opinion on the merits of the case, which opinion may be delivered to the parties jointly either orally or in writing. The manner in which the information is presented will vary from case to case, depending upon the circumstances and the terms of the parties’ ADR Agreement. Presentations may range from an informal proffer of evidence together with limited argument from the parties to a more formal presentation, with oral testimony and documentary evidence and argument from counsel, such as may be done in the context of a minitrial. 5. Summary Binding Decision. This is a binding ADR procedure similar to binding arbitration under which, by prior agreement of the parties, the ADR Neutral renders a brief, written decision that is to

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be binding, non-precedential, and non-appealable. As in a procedure under which the Neutral provides a nonbinding advisory opinion, the manner in which information is presented for a summary binding decision may vary depending on the circumstances of the particular case and the wishes of the parties as outlined in their ADR Agreement.164

2E.5. ADR in the Court of Federal Claims The Court of Federal Claims recognizes several forms of voluntary, nonbinding ADR procedures. These include mediation, minitrials, early neutral evaluation, and nonbinding arbitration. The COFC usually appoints a settlement judge or a third-party neutral to conduct these proceedings. Importantly, in 2007, the Court of Federal Claims established the ADR Automatic Referral Program, which, as its name suggests, automatically assigns all cases (except for bid protest cases) before participating judges to ADR judges for ADR consideration. This program was instituted to facilitate meetings with these ADR judges, or settlement judges, who assist the parties in reaching a better understanding of each other’s claims, contentions, and prospects for settlement.165 If your case is assigned to a judge participating in the ADR Automatic Referral Program, you should make a good-faith effort to reach a settlement during ADR, knowing that if negotiations fail, the case will be resolved when litigation concludes and the presiding judge issues a decision on the matter. Contractors whose cases are not heard by a judge participating in the Automatic Referral Program should note that ADR is available at their election.

2E.6. ADR in the United States Court of Appeals for the Federal Circuit As previously mentioned, contractors can appeal an adverse decision of the BCA or the COFC to the United States Court of Appeals for the Federal Circuit. Since Congress enacted the Administrative Disputes Resolution Act of 1996, each federal district court is required to implement its own ADR program “to encourage and promote the use of alternative dispute resolution in its district.”166 The Federal Circuit currently runs a confidential mediation program through the Office of General Counsel wherein parties present their dispute to an outside, volunteer mediator appointed by the court to settle

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the case.167 The Federal Circuit’s volunteer mediators include magistrate judges, experienced attorneys, and mediators with expertise in the substantive areas of the Federal Circuit’s jurisdiction.168 These volunteers cannot be in active practice, and they must decline to participate in any cases in which they have an actual or perceived conflict of interest. Mediation is nonbinding, meaning that the procedure culminates in a settlement only if all parties agree to that settlement.

Endnotes 1. FAR 2.101. 2. See, e.g., CA. PUB. CONT. § 20104.2 (1994) (requiring that claims be made in writing with supporting documentation pursuant to Local Agency Public Construction Act of California). 3. Article 10.01 et seq., EJCDC C-700 Standard General Conditions, “If Owner and Contractor are unable to agree on entitlement to, or on the amount or extent, if any, of an adjustment in the Contract Price or Contract Times, or both, that should be allowed as a result of a Work Change Directive, a Claim may be made therefore : : : All Claims : : : shall be referred to the Engineer for decision. A decision by Engineer shall be required as a condition precedent to any exercise by Owner or Contractor of any rights or remedies either may otherwise have under the Contract Documents or by Laws and Regulations.” 4. § 15.1.1, AIA Document A201-2007. 5. Jackson Constr. Co. v. United States, 62 Fed. Cl. 84, 105 n.7 (2004). 6. CEMS, Inc. v. United States, 59 Fed. Cl. 168, 206–07 (2003). 7. Hardwick Bros. Co., II, v. United States, 36 Fed. Cl. 347, 406 (1996). 8. See Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598, 675 (2010) (explaining that a constructive change is “an equitable adjustment to the contract that seeks to ‘make a contractor whole when the Government modifies a contract’”). 9. CEMS, Inc., 59 Fed. Cl. at 203. 10. See Aydin Corp. v. Widnall, 61 F.3d 1571, 1577 (Fed. Cir. 1995) (“Where it requires a constructive change in a contract, the Government must fairly compensate the contractor for the costs of the change”). 11. UMC Elecs. Co. v. United States, 43 Fed. Cl. 776, 796 (Fed. Cl. 1999) (quoting Bruce Constr. Corp. v. United States, 324 F.2d 516, 518 (Ct. Cl. 1963)). 12. Datalect Comp. Servs., Ltd. v. United States, 41 Fed. Cl. 720, 722 (1998), aff’d, 215 F.3d 1344 (Fed. Cir. 1999). 13. Servidone Constr. Corp. v. United States, 931 F.2d 860, 861 (Fed. Cir. 1991) (citing Wunderlich Contracting Co. v. United States, 351 F.2d 956, 968 (Ct. Cl. 1965)). 14. Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 767 (Fed. Cir. 1987). 15. Fireman’s Fund Ins. Co., 92 Fed. Cl. at 698.

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16. See H.L. Smith, Inc. v. Dalton, 49 F.3d 1563, 1564 (Fed. Cir. 1995) (“Neither the CDA nor. . . the FAR, requires submission of a detailed cost breakdown or other specific cost-related documentation with the claim. . . the contractor may supply adequate notice of the basis and amount of the claim without accounting for each cost component”). 17. See Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1583 (Fed. Cir. 1995) (holding that “the FAR requires a ‘claim’ to be a written demand seeking a sum certain (or other contract relief) as a matter of right, but not necessarily in dispute, is consistent with the ordinary meaning of the term ‘claim’: ‘a demand for something due or believed to be due.’ That the demand is made as a matter of right constitutes the essential characteristic of a ‘claim’ according to both the FAR and the dictionary definitions. : : : Nothing in the common definition of ‘claim,’ however, requires a pre-existing dispute before a demand as a matter of right can be a claim.”) (quoting Claim, Webster’s New Collegiate Dictionary 244 (9th ed. 1990). 18. See Fru-Con Constr. Corp. v. United States, 43 Fed. Cl. 306, 324–25 (1999) (“Plaintiff bears the burden of proof that oral notice was given, but the trier of fact must make the determination in the case of conflicting testimony”). 19. Miller Elevator Co. v. United States, 30 Fed. Cl. 662, 686 (1994). 20. Metric Constr. Co. v. United States, 81 Fed. Cl. 804, 818 (2008). 21. FAR 52.236-2(d). 22. 41 U.S.C. § 7103(a)(4)(A) (2011). 23. Uniglobe Gen. Trading & Contracting Co. v. United States, 107 Fed. Cl. 423, 431 (2012). 24. FAR 33.201. 25. FAR 52.243-4, 52.236-2, 52.249-10, 52.242-14. 26. A201-2007. 27. Art. 9.4, ConsensusDOCS 500 Owner/Contractor Agreement/General Conditions (2007). 28. Art. 11.06. EJCDC C-700 Standard General Conditions of the Construction Contract (2013). 29. Com. v. AMEC Civil, LLC, 699 S.E.2d 499, 506 (Va. 2010); Flory Small Bus. Dev. Ctr., Inc. v. Com., 541 S.E.2d 915, 919–20 (Va. 2001). 30. Northrop Grumman Corp. v. United States, 47 Fed. Cl. 20, 62–63 (2000). 31. Missouri Research Labs, Inc., ASBCA No. 12355, 69-1 BCA ¶ 7762. 32. Machinery Assocs., Inc., ASBCA No. 14510, 72-2 BCA ¶ 9476. 33. JOSEPH HUESMAN ET. AL., UNITED STATES CENSUS BUREAU, Value of Construction Put in Place Survey, CB15-175 (Nov. 2, 2015), available at http://www.census.gov/ construction/c30/pdf/release.pdf. 34. Joseph A. McManus et al., When and How to File a Federal Contract Claim, in CONSTRUCTION LAW HANDBOOK 1530 (Richard K. Allen et al. eds., 2d ed. 2009 & Supp. 2015). 35. FAR 33.202. 36. See http://www.gpo.gov/fdsys/pkg/USCODE-2011-title41/pdf/USCODE2011-title41-subtitleIII.pdf. Also, more recent amendments may be located by searching at the U.S. Government Printing Office website (http://www.gpo. gov/fdsys/search/home.action). Each section should be searched separately as they may be amended individually.

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37. FAR 33.201. 38. See Newport News Shipbuilding & Dry Dock Co. v. Garrett, 6 F.3d 1547, 1553 (Fed. Cir. 1993) (“Absent appropriate certification, the contracting officer has no CDA claim on which to issue any decision”); see also McManus, supra note 34, at 1556-57. 39. Contract Cleaning Maint., Inc. v. United States, 811 F.2d 586, 592 (Fed. Cir. 1987). 40. OK’s Cascade Co. v. United States, 87 Fed. Cl. 739, 746 (2009). 41. 41 U.S.C. § 7103(b). 42. FAR 33.207(c). 43. See Trafalgar House Constr., Inc. v. United States, 73 Fed. Cl. 675, 694 (2006) (“The CDA requires that a subcontractor’s claims against the government be brought by the prime contractor”). 44. Century Constr. Co. v. United States, 22 Cl. Ct. 63, 66 (1990). 45. Trafalgar House Constr., Inc., 73 Fed. Cl. at 694. 46. Roxco, Ltd. v. United States, 77 Fed. Cl. 138, 150 (2007). 47. 41 U.S.C. § 7103(f)(1). 48. 41 U.S.C. § 7103(f)(2). 49. See Images II, Inc., ASBCA No. 47943, 94-3 BCA ¶ 27,277 (explaining that there must be evidence that the contractor received a copy of the decision). 50. Alliance Oil & Refining Co. v. United States, 13 Cl. Ct. 496, 500 (1987), aff’d, 856 F.2d 201 (Fed. Cir. 1988). 51. FAR 33.211(a)(4)(v). 52. Wilner v. United States, 24 F.3d 1397, 1401 (Fed. Cir. 1994). 53. Pathman Constr. Co. v. United States, 817 F.2d 1573, 1575 (Fed. Cir. 1987) (construing 41 U.S.C. § 7103(f)(5)). 54. Jones & Artis Constr. Co. v. D.C. Contract Apps. Bd., 549 A.2d 315, 319 (D.C. 1988). 55. See OFFICE OF GENERAL COUNSEL, U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-09-471SP, BID PROTESTS AT GAO: A DESCRIPTIVE GUIDE (9th ed. 2009), available at http:// www.gao.gov/assets/210/203631.pdf (discussing various bid-protest procedures); see also FAR 33.101 et seq. 56. See Awad v. United States, 301 F.3d 1367, 1373 (Fed. Cir. 2002) (explaining that for a cause of action to arise in tort, and not in contract, the tort claim cannot stem from a breach of contract, meaning it must be independent from any alleged failure to perform explicit or implicit contractual obligations). 57. 28 U.S.C. § 1491(a)(1). 58. Croman Corp. v. United States, 724 F.3d 1357, 1364 (Fed. Cir. 2013) (quoting Librach v. United States, 147 Ct. Cl. 605, 612 (1959)). 59. Knotts v. United States, 121 F. Supp. 630, 631 (Ct. Cl. 1954). 60. Wilner, 24 F.3d at 1403. 61. Id. at 1401. 62. Id. 63. LaBarge Products, Inc. v. West, 46 F.3d 1547, 1554 (Fed. Cir. 1995). 64. Bonneville Assocs. v. United States, 43 F.3d 649, 653 (Fed. Cir. 1994). 65. Grinnell v. United States, 71 Fed. Cl. 202, 204 (2006). 66. 41 U.S.C. § 7103(a)(3).

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67. Seaboard Lumber Co. v. United States, 903 F.2d 1560, 1562 n.3 (Fed. Cir. 1990); Holly Corp., ASBCA No. 24975, 80-2 BCA ¶ 14,675. 68. Bonneville Assocs., 43 F.3d at 653. 69. Michael J. Schaengold & Robert S. Brams, Choice of Forum for Government Contract Claims: Court of Federal Claims vs. Board of Contract Appeals, 17 FED. CIR. B.J. 279, 314 (2007). 70. Martin Marietta Info. & Com. Sys., ASBCA No. 39615, 90-3 BCA ¶ 23,145. 71. Hardwick Bros., 36 Fed. Cl. at 421. 72. Rohr, Inc., ASBCA No. 44376, 93-2 BCA ¶ 25,871. 73. 41 U.S.C. § 7105(e)(2). 74. Carol N. Park-Conroy, Practicing before the Federal Boards of Contract Appeals, 2012 ABA SEC. PUB.CONTRACT L. 6, available at http://www.americanbar.org/ content/dam/aba/administrative/public_contract_law/final_version_practicing_ before_the_federal_boards_of_contract_appeals.authcheckdam.pdf (last visited Nov. 30, 2015). 75. 41 U.S.C. § 7104(a). 76. House of Joy Transitional Programs v. Soc. Sec. Admin., CBCA No. 2535, 12-1 BCA ¶ 34,991. 77. Greenlee Constr., Inc. v. Gen. Servs. Admin., CBCA No. 416, 07-1 BCA ¶ 33,514; Haines v. Kerner, 404 U.S. 519, 520 (1972). 78. 28 U.S.C. § 2412(d)(1)(A). 79. 5 U.S.C. § 504(a)(1). 80. 5 U.S.C. § 504(b)(1)(B). 81. 5 U.S.C. § 504(a)(2). 82. 5 U.S.C. § 504(b)(1)(A). 83. Marino Constr. Co., VABCA No. 2752, 90-1 BCA ¶ 22,553. 84. Fed. Data Corp. v. SMS Data Products Grp., 819 F.2d 277, 280 (Fed. Cir. 1987). 85. United Partition Sys., Inc. v. United States, 59 Fed. Cl. 627, 642 (2004). 86. 41 U.S.C. § 7104(b)(3) (2011). 87. M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323, 1328 (Fed. Cir. 2010). 88. Cubic Corp. v. United States, 20 Cl. Ct. 610, 616 (1990). 89. Martin J. Simko Constr. Inc. v. United States, 852 F.2d. 540, 545 (Fed Cir. 1988). 90. See 41 U.S.C. § 7103(a)(5) (explaining that “[t]his section does not authorize any agency head to settle, compromise, pay, or otherwise adjust any claim involving fraud”). 91. Mega Constr. Co. v. United States, 29 Fed. Cl. 396, 438–39 (1993). 92. 28 U.S.C. § 2412(d)(1)(A). 93. Maitland Bros. Co., ASBCA 86-2 B.C.A. (CCH) ¶18,796 (“Appellant’s reliance on 28 U.S.C. § 2412 is misplaced. This section pertains to court proceedings. Agency proceedings, including those before the agency boards of contract appeals, in which fees and expenses may be awarded, are covered by Section 504 of Title 5, United States Code”). 94. Scarborough v. Principi, 541 U.S. 401, 405 (2004) (“[The] EAJA authorizes the payment of fees to a prevailing party in an action against the United States; the Government may defeat this entitlement by showing that its position in the underlying litigation ‘was substantially justified’”).

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95. 96. 97. 98. 99. 100. 101. 102. 103. 104.

105.

106. 107. 108.

109.

110. 111. 112. 113.

114. 115.

116. 117. 118. 119. 120. 121. 122. 123.

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28 U.S.C. § 2412(d)(2)(B). Scarborough, 541 U.S. at 408. 28 U.S.C. § 2412(d)(2)(B); 5 U.S.C. § 504(b)(1)(B). Blum v. Stenson, 465 U. S. 886. 897 (1984). 28 U.S.C. § 2412(d)(2)(A). 28 U.S.C. § 1295(a)(10) (2012). 28 U.S.C. § 1295(a)(3). 41 U.S.C. § 7107(a)(2). 41 U.S.C. § 7107(a)(1)(A). Form 5, “Petition for Review or Appeal of an Order or Decision of an Agency, Board, Commission, or Officer,”UNITED STATES COURT OF FEDERAL CLAIMS, available at http://www.cafc.uscourts.gov/sites/default/files/rules-of-practice/form5.pdf (last visited Nov. 30, 2015). Rules of Practice, UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT (June 1, 2011), available at http://www.cafc.uscourts.gov/sites/default/files/rules-ofpractice/rules.pdf. M.A. Mortenson Co. v. Brownlee, 363 F.3d 1203, 1205 (Fed. Cir. 2004). 41 U.S.C. § 7107(b). Yancey v. United States, 915 F.2d 1534, 1537 (Fed. Cir. 1990), citing Cooper v. United States, 827 F.2d 762, 763 (Fed. Cir. 1987); Milmark Services, Inc. v. United States, 731 F.2d 855, 857 (Fed. Cir. 1984)). See SMS Data Products Grp., Inc. v. United States, 900 F.2d 1553, 1555 (Fed. Cir. 1990) (“Conclusions of law are reviewed de novo, however, and some deference is given to the Board’s expertise in interpreting contract regulations”); United States v. Lockheed Corp., 817 F.2d 1565, 1567 (Fed. Cir. 1987) (“Legal interpretations by tribunals having expertise are helpful to [the court], even if not compelling”). 28 U.S.C. § 1295(a)(3). 28 U.S.C. § 651(a). 41 U.S.C. § 7104(a). See Lakeview Constr. Co. v. United States, 21 Cl. Ct. 269, 277–78 (1990) (dismissing contractor’s complaint because there was no proof of receipt by the contracting officer during the appropriate time period to sustain subject matter jurisdiction). 48 C.F.R. 6101.2 (2011). See, e.g,. GSA Form 2465, Notice of Appeal, UNITED STATES CIVILIAN BOARD OF CONTRACT APPEALS, available at http://www.cbca.gsa.gov/files/forms/gsaform-2465-notice-of-appeal.pdf (last visited Nov. 30, 2015) (providing a standard-form notice of appeal). In re Birkart Globistics AG, ASBCA No. 53458, 06-1 BCA ¶ 33,138. 41 U.S.C. § 7105 (2011). 41 U.S.C. §§ 7105(b), 7105(e)(1)(B). 41 U.S.C. § 7105(c). 41 U.S.C. § 7105(e)(1)(c). 41 U.S.C. § 7106(a). Id. 41 U.S.C. § 7106(b).

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124. 125. 126. 127. 128. 129. 130. 131. 132.

133. 134. 135. 136. 137. 138. 139. 140.

141.

142.

143. 144. 145. 146. 147. 148.

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41 U.S.C. § 7106(b)(2). 41 U.S.C. § 7106(b)(4). 41 U.S.C. § 7105(a)(2)–(b)(2)(B). 28 U.S.C. § 174(a) (1992). 41 U.S.C. § 7107(a)(1)(A). 41 U.S.C. § 7107(b)(1). 41 U.S.C. § 7104(b)(3). Schaengold, supra note 69, at 310. U.S. Court of Federal Claims Fee Schedule, US COURTS.GOV, http://www.uscourts. gov/services-forms/fees/us-court-federal-claims-fee-schedule (last visited Nov. 30, 2015). FED. CI. R. 83.1(3) FED. CI. R.83.1(a)(3). 28 U.S.C. § 2412. 41 U.S.C. § 7107(a)(1)(A). 41 U.S.C. §§ 7107(b)(1)-(2). 28 U.S.C. § 1295(a)(3). Kellogg Brown & Root Servs. v. United States, 728 F.3d 1348, 1358 (Fed. Cir. 2013). Form 2, Notice of Appeal to the United States Court of Appeals for the Federal Circuit from a Judgment or Order of the United States Court of Federal Claims, UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT, available at http://www.cafc. uscourts.gov/sites/default/files/rules-of-practice/form2.pdf (last visited Nov. 30, 2015). Downloadable Federal Circuit Forms, UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT, Form 12, Informal Brief (District Court, Court of International Trade, and Court of Federal Claims Cases, http://www.cafc.uscourts.gov/sites/ default/files/rules-of-practice/form12.pdf (last visited Nov. 30, 2015). Court of Appeals Miscellaneous Fee Schedule, UNITED STATES COURTS.GOV. http:// www.uscourts.gov/services-forms/fees/court-appeals-miscellaneous-feeschedule (last visited Nov, 30, 2015). 28 U.S.C. § 1295(c). SUP. CT. R. 10. 28 U.S.C. § 651(a). 41 U.S.C. § 7105(g)(1). FAR 33.214(a). See, e.g., CIVILIAN BOARD OF CONTRACT APPEALS, If Alternative Dispute Resolution Does Not Result in Settlement, available at http://www.cbca.gsa.gov/adr/nosettlement.html (“For docketed appeals, if ADR fails to resolve the dispute completely, the appeal will generally return to the presiding judge for adjudication. . . For ADR in cases which have not been docketed as appeals, if a claim has not been submitted under the Contract Disputes Act, one can be submitted to the contracting officer for decision”) (last visited Nov. 30, 2015); ARMED SERVICES BOARD OF CONTRACT APPEALS, Notice Regarding Alternative Methods of Dispute Resolution (Sept. 20, 2013), available at http://www.asbca.mil/ADR/ ADR%20Notice%20Rev20130920_Ltrhead.pdf (“Any method, or combination of methods, including one that will result in a binding decision, may be selected

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149.

150. 151.

152. 153. 154. 155. 156. 157. 158. 159. 160. 161.

162. 163. 164.

165.

166. 167.

168.

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by the parties without regard to the dollar amount in dispute”) (last visited Nov. 30, 2015). See A Guide to ADR Activity at the ASBCA, ARMED SERVICES BOARD OF CONTRACT APPEALS (Feb. 5, 2015) (showing that in each fiscal year from 1987 through 2014 the percentage of successful nonbinding ADRs was 93% or higher, and 100% for FY 13 and FY 14), available at http://www.asbca.mil/ADR/ADR%20Statistics %20table%20website%2020150205.pdf. 5 U.S.C. § 574; 28 U.S.C. § 652(d). See, e.g., ADR Confidentiality Agreement, UNITED STATES COURT OF FEDERAL CLAIMS, available at http://www.uscfc.uscourts.gov/sites/default/files/14.02.20_ADR_ Sample_Form.pdf (last visited Nov. 30, 2015). 41 U.S.C. § 7103(h)(3)(A). See 5 U.S.C. §§ 572(b)(1)-(6) (enumerating the six scenarios where “an agency shall not consider using a dispute resolution proceeding”). FAR 33.214(a). Reba A. Page and Paul Williams, The ASBCA’s Path to the “Mega ADR” in Computer Sciences Corporation, 49 THE PROCUREMENT LAW. 16 (2013). Id. at 18. 5 U.S.C. § 571(6) (1996). 5 U.S.C. § 571(3). Page & Williams, supra note 155, at 17. Schaengold, supra note 69, at 318. See Addendum II – Alternative Methods of Dispute Resolution, Rules of the Armed Services Board of Contract Appeals 2, ARMED SERVICES BOARD OF CONTRACT APPEALS (July 21, 2014), available at http://www.asbca.mil/Rules/forms/Final%20Rule %20Formatting%20pgl.pdf#page=1 [hereinafter ASBCA Addendum II]. Page & Williams, supra note 155, at 18. ASBCA Addendum II, supra note 161, at 2-3. Types of Alternative Dispute Resolution, UNITED STATES CIVILIAN BOARD OF CONTRACT APPEALS, http://www.cbca.gsa.gov/adr/types.html (last visited Nov. 30, 2015). Notice of ADR Automatic Referral Program and ADR Automatic Referral Procedures, U.S. CT. FED. CL., GENERAL ORDER NO. 44 (June 21, 2007), http://www.uscfc. uscourts.gov/sites/default/files/court_info/ADR_Procedures.pdf. 28 U.S.C. § 651(b). Appellate Mediation Program Guidelines, U.S. COURT OF APPEALS FOR THE FEDERAL CIRCUIT, (Dec. 6, 2013), http://www.cafc.uscourts.gov/sites/default/files/ Dec-2013-Revision/mediation%20guidelines_effective_12-6-2013.pdf. See, e.g., Volunteer Mediators, U.S. COURT OF APPEALS FOR THE FEDERAL CIRCUIT, available at http://www.cafc.uscourts.gov/mediation/mediators (last visited Nov. 30, 2015) (listing volunteer mediators currently participating in the Federal Circuit’s appellate mediation program).

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Chapter 3

Differing Site Conditions Marilyn Klingera

3.1. Introduction The advent and increasing use of 3D/building information modeling (BIM) and laser technology, among other new technologies, already have far-reaching benefits for the construction industry. Structural steel, electrical, HVAC, plumbing, fire sprinkler, and communications trades may garner substantial coordination benefits from BIM, and laser technology is a major boon to any kind of renovation or retrofit project. However, BIM, laser, or any other new technology used in the construction industry cannot yet solve the unknown problems on a construction site, particularly those underground, such as unexpected soils and water issues; archeological issues such as native burial sites; endangered species;1 unknown hazardous waste such as contaminated soils;2 or undisclosed, undocumented, or conflicting utilities3 such as forgotten utility lines, abandoned storage tanks, or inadequately described steel well casings.4 Thus, differing site conditions continue to be a major cause of claims activity in the construction industry. Those claims encompass not only the excess cost needed to deal with a newly discovered site condition, but also involve delay and/or acceleration claims. Indeed, differing site conditions usually comprise subsurface physical conditions such as geological configurations, suitability of soils;5 unavailability of materials;6 the bearing capacity and stability of soils; and the existence of rocks and boulders,7 sand, or clay that differ from those promised or implied in the contract documents or of an unusual a

Chair Emeritus, Construction Practice Group, Sedgwick LLP. 69

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nature materially different from those normally encountered. Such conditions also include unexpected groundwater,8 water tables,9 and surface water. Therefore, the differing site conditions clause in a construction contract most often comes into play when dealing with subsurface conditions. However, differing site conditions can also include manmade site conditions from previous or concurrent construction activities. This chapter reviews various types of differing site conditions and the parties’ duties and obligations upon the discovery of such conditions.10

3.2. Differing Site Conditions Clauses The “differing site conditions” clause of the Federal Acquisition Regulation (FAR) states11 (a) The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site, of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract. (b) The Contracting Officer shall investigate the site conditions promptly after receiving the notice. If the conditions do materially so differ and cause an increase or decrease in the Contractor’s cost of, or the time required for, performing any part of the work under this contract, whether or not changed as a result of the conditions, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly. (c) No request by the Contractor for an equitable adjustment to the contract under this clause shall be allowed, unless the Contractor has given the written notice required; provided, that the time prescribed in (a) above for giving written notice may be extended by the Contracting Officer. (d) No request by the Contractor for an equitable adjustment to the contract for differing site conditions shall be allowed if made after final payment under this contract.

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3.3. Two Types of Differing Site Conditions As noted above, the FAR, consistent with history, classifies differing site conditions into two types. Type One conditions are “subsurface or latent physical conditions at the site differing materially from those indicated in this contract.” Latent conditions include natural or manmade conditions that are hidden from normal investigations. Substantiation of a Type One claim is accomplished by demonstrating that the conditions actually encountered differ from those indicated in the plans and specifications. Type Two conditions are “unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.” The key words here are “unknown,” “unusual,” and “differing materially.” To substantiate a Type Two differing site condition, the contractor must demonstrate that he or she could not reasonably anticipate the conditions encountered at the time of bid. In the absence of a specific clause contemplating differing site conditions, the problems described subsequently would typically be processed as claims through the traditional changes clause. The American Institute of Architects (AIA) A201, “Concealed or Unknown Conditions” (¶3.7.4) provides as follows:12 If the Contractor encounters conditions at the site that are (1) subsurface or otherwise concealed physical conditions that differ materially from those indicated in the Contract Documents or (2) unknown physical conditions of an unusual nature, that differ materially from those ordinarily found to exist and generally recognized as inherent in construction activities of the character provided for in the Contract Documents, the Contractor shall promptly provide notice to the Owner and the Architect before conditions are disturbed and in no event later than 21 days after first observance of the conditions. The Architect will promptly investigate such conditions and, if the Architect determines that they differ materially and cause an increase or decrease in the Contactor’s cost of, or time required for, performance of any part of the Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or both. If the Architect determines that the conditions at the site are not

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materially different from those indicated in the Contract Documents and that no change in the terms of the Contract is justified, the Architect shall promptly notify the Owner and Contractor in writing, stating the reasons. If either party disputes the Architect’s determination or recommendation, that party may proceed as provided in Article 15.

Thus, the AIA uses almost identical language. One key difference is that the FAR requires “prompt” notice, whereas the AIA provision gives the contractor a 21-day window. A contractor must use its best judgment as to whether it really should wait 21 days to advise the owner that the contractor has encountered an unexpected, potentially problematic condition. The ConsensusDocs (¶3.16), “Worksite Conditions”13 is similar in meaning but not language: 3.16.1 WORKSITE VISIT The Contractor acknowledges that it has visited, or has had the opportunity to visit, the Worksite to visually inspect the general and local conditions which would affect the Work. 3.16.2 CONCEALED OR UNKNOWN SITE CONDITIONS If the conditions at the Worksite are (a) subsurface or other physical conditions which are materially different from those indicated in the Contract Documents, the Contractor shall stop Work and give immediate written notice of the condition to the Owner and the Architect/ Engineer. The Contractor shall not be required to perform any work relating to the unknown condition without the written mutual agreement of the Parties. Any change in the Contract Price or the Contract Time as a result of the unknown condition shall be determined as provided in Article 8. The Contractor shall provide the Owner with written notice of any claim as a result of unknown conditions within the time period set forth in Paragraph 8.4. The Engineers Joint Contract Documents Committee (EJCDC) Standard General Conditions differing site conditions clause14 contains more extensive language regarding the technical data that the owner provides to the contractor in its Differing Subsurface or Physical Conditions [¶¶ 5.02 and 5.03]: B. Reliance by Contractor on Technical Data Authorized: Contractor may rely upon the accuracy of the Technical Data expressly

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identified in the Supplementary Conditions with respect to such reports and drawings, but such reports and drawings are not Contract Documents : : : . Except for such reliance on Technical Data, Contractor may not rely upon or make any claim : : : with respect to:

1. the completeness of such reports and drawings for Contractor’s purposes, including, but not limited to, any aspects of the means, methods, techniques, sequences, and procedures of construction to be employed by Contractor, and safety precautions and programs incident thereto; or 2. other data, interpretations, opinions, and information contained in such reports or shown or indicated in such drawings; or 3. any Contractor interpretation of or conclusion drawn from any Technical Data, interpretations, opinions, or information. However, the EJCDC form includes similar wording regarding Type One and Type Two differing site conditions: “3. differs materially from that shown or indicated in the Contract Documents; or 4. is of an unusual nature, and differs materially from conditions ordinarily encountered and generally recognized as inherent in work of the character provided for in the Contract Documents.” The foregoing demonstrates the need to read the contract carefully to make sure it contains a differing site conditions clause.

3.4. Type One Conditions—Examples Type One differing site conditions are essentially subsurface or latent physical conditions at the site that differ materially from those indicated in the contract documents. Some suggest that the grandfather of judicial decisions regarding Type One differing site conditions is Spearin v. United States.15 In Spearin, an unknown dam in a large sewer pipe caused the flooding of the dry-dock contractor’s jobsite. Justice Brandeis set forth the rule that applies where plans and specifications do not disclose certain conditions that will affect the contractor’s construction:

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If the contractor is bound to build according to the plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications. This implied warranty is not overcome by the general clauses requiring the contractor to examine the site, to check up the plans, and to assume responsibility for the work until completion and acceptance.

No examples of Type One or Type Two differing site conditions are really typical, and sometimes the courts mix them up because in either situation the contractor is usually entitled to compensation for the added costs and time incurred in dealing with the condition that was materially different from what the contractor contemplated, as long as the contractor was diligent in its initial investigation. Nonetheless, the following lists examples of Type One differing site conditions, demonstrating the wide range of problems that contractors can encounter: • Rock or boulders in an excavation area where the owner had indicated there were none; • Rock or boulders at materially different size or elevations than indicated in the data available to bidders;16 • Permafrost where the contract documents had indicated there was none; • Subsurface water where the contract documents had indicated there was none;17 • Loose, soft material at a location and elevation where the boring data indicated the existence of rock; • Different behavior characteristics and workability of soils compared with the type of soils indicated in the contract or from the borings;18 • Failure of designated borrow pits or quarry sites to produce the required materials to the degree reasonably anticipated from the prebid data;19 • Rock debris or other subsurface obstructions in substantially greater quantities than what the bid documents indicated; • The existence of a subfloor that the drawings did not show in a contract to renovate a building; • A different type of sewer than what was indicated in the contract drawings;20

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• Groundwater at a higher elevation and in quantities in excess of that indicated or reasonably anticipated from the data available to bidders; • Rock materially harder or tougher to excavate or drill and blast than was expected from information available prior to bidding; • Higher moisture content in soils to be compacted than was anticipated from the contract data; • Ground contour elevations at the site differing from those shown on the drawings; • Taxiway crossovers that the drawings did not disclose; • Government’s prior jacking of buildings, causing them to be seriously out of plumb, that was not indicated on contract documents;21 and • Actual conditions of stage one construction different from conditions represented in stage two contractor’s specifications.22

Where incorrect plans and specifications mislead a contractor who, acting reasonably, relied on those incorrect plans and specifications as the basis for his or her bid and who, as a result, submitted a bid lower than otherwise, the contractor typically can recover for extra work or expenses incurred as a result of the differing site conditions.23 By the same token, even when soils and feasibility studies are inaccurate, if the contractor has reason to know that the soil sampling methodology was flawed, the contractor may not be able to recover excess costs from the owner when encountering difficult conditions, such as high clay concentrations in soil.24 Based on the many Type One differing site condition cases that the courts have decided over the years, the contractor must prove six elements to prevail on a Type One differing site condition claim:25 • The contract affirmatively indicated or represented the construction site conditions. • The contractor reasonably interpreted the contract documents. • The indications in the contract documents induced the contractor’s reasonable reliance thereon. • The construction site conditions encountered differed materially from those indicated in the contract documents. • The actual construction site conditions were reasonably unforeseeable.

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• The contractor’s excess costs were solely attributable to the materially different construction site conditions.

Another issue is whether a contractor may recover when the plans and specifications are correct but the public authority failed to disclose information in its possession that materially affected the cost of performance. Courts have held that a contractor need not prove an affirmative fraudulent intent of the agency to conceal the information from the contractor. Rather, the contractor is entitled to recover for excess costs if the public entity had additional relevant information that would affect the contractor’s price but failed to disclose that information to the contractor.26 This rule is not unlimited, however. Relief for nondisclosure is appropriate only when (1) the contractor submitted the bid without having the material information, (2) the agency was in possession of the information and was aware that the contractor had no knowledge of such information, (3) the contract documents misled the contractor or failed to put it on notice to inquire, and (4) the public entity failed to provide the relevant information.27

3.5. Type Two Conditions—Examples Type Two differing site conditions are unknown physical site conditions of an unusual nature that differ materially from those ordinarily encountered and generally recognized as inherent in work of the character indicated in the contract. The following lists examples of Type Two differing site conditions claims: • Unexpected and highly corrosive nature of groundwater at the site, damaging the contractor’s dewatering equipment; • Subterranean cavern;28 • Below-surface conditions preventing well drilling as expected;29 • Excessive hydrostatic pressure; • Jet fuel flooding manholes because of unknown blockage in airport drainage system; • Caked material in heating ducts to be cleaned under contract; • Unknown and unanticipated oily substance preventing adherence of polyvinyl chloride to a roof;

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• Failure of rock from an approved borrow pit to fracture in a manner expected for production of contract aggregate; • Hard and abrasive rock;30 • Excessive water;31 • Traffic regulations;32 and • Spoils at ocean bottom rather than hard coral.33

3.6. Forces of Nature Forces of nature—situations included in a force majeure provision in a contract, also called “acts of God”—generally do not qualify as differing site conditions because they constitute physical changes after contract award.34 Other forms of force majeure conditions include oil spills and labor strikes.35 Exceptions occur, however. For example, when a roadway built for construction use became a quagmire due to an early thaw, unusual capillary action, and questionable drainage, the court held the extra maintenance expenditures to be an unforeseen (unusual) condition.36 In another case where inadequate drainage contributed to a quagmire condition, the court affirmed that the contractor was entitled to an equitable adjustment for changed conditions.37

3.7. Investigation of the Site and the Plans and Specifications The most vulnerability a contractor will experience in claiming extra costs and additional time as a result of a differing site condition is when he or she failed to conduct a diligent and reasonable investigation of the construction site before submitting a bid or entering into the contract.

3.7.1. Duty to Investigate: Reasonable Investigation In general, site investigations are based on observance of the apparent surface conditions. Bidders do not usually have access to the project site to make detailed studies of surface features, let alone subsurface conditions. Even with access, time and money present major obstacles to detailed study and further exploration at the bid stage. However, the

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bidder’s duty is to investigate the site to become familiar with local conditions and to allow for a bid adjustment following any unusual findings. In turn, the owner is responsible for allowing appropriate time and access so that the bidders can conduct a reasonable investigation. Under the rubric of “site investigation,” the contractor is obligated to review any and all documentation and other material that the owner has provided to the contractor, either in the contract documents or as a part of the bid process. So, if the owner advises that certain information or material is available in its off-site offices, for example, contractors typically must review that information or risk not recovering when they encounter conditions indicated by that information but not reviewed prior to bid issuance. Examples of the foregoing are discussed in the following.

3.7.2. Inadequate Investigation In preparing a bid, the contractor assumes responsibility for adequately investigating the site and materials made available. Failure to do so will not excuse extra costs incurred in overcoming the adverse conditions encountered. Examples of inadequate investigations include the following: • A contractor who performed two channel-dredging projects after having reviewed the owner’s records, removed physical samples of the material to be dredged, and performed echo soundings of the channel bottoms but failed to take any of those measures for the third channel-dredging project. The contractor was not entitled to compensation for a differing site condition when it experienced dredging material with significantly higher densities than contemplated, requiring additional time to complete the contract.38 • A contractor did not notice that the existing paint beneath the paint surface was peeling when it entered into a contract to repaint existing bridges. When the contractor sued for the additional cost to remove the peeling paint, the court rejected its claim because of the failure to notice the paint condition even though the contract did not specifically address removal of peeling paint. The court held that “[t]he company here explicitly assumed the responsibility for examining the bridge and determining the subsurface [beneath the paint surface] conditions. This duty cannot be excused simply because the company’s visual inspection proved to be inadequate.”39

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• A contractor claimed a differing site condition based on the crumbling of the hill rising over its workplace. The court found that the contractor inadequately investigated the site before bidding, underestimating the probable extent of raveling because it failed to inspect the site sufficiently, failed to discuss conditions with government personnel or contractors then working in the area, failed to properly evaluate visible and expectable conditions, failed to examine the available logs of drillholes near the slope, and failed to follow up on a note in the bid documents that stated “fault and joint systems known to exist in inlet area are not represented on this drawing.” As the court stated, the contractor cannot “rest content with the materials physically furnished to him; he must also refer to other materials which are available and about which he is told by the contract documents.”40 • A contractor entered into a contract to install fuel oil and diesel oil piping on the underside of piers where it was to be suspended by hangers and supports. The contractor did not examine the worksite before submitting a bid although the contract expected an inspection. The contractor fabricated hundreds of pipe hangers based on the pipe dimensions for a typical hanger. The contractor then discovered the hangers could not be used due to interference from pilings supporting the concrete deck of the piers and the uneven grade on the underside of the concrete deck.41 • A contractor claimed it encountered unexpected underground water. The contract documents included boring logs but not gradation curves, other test results, or soil samples—all of which were available for inspection at a government office. However, the contractor did not inspect this additional information. The contractor obtained quotes from three subcontractors, and none of the subcontractors reviewed the available material either. Interestingly, the contractor visited the site and observed a creek bed—a harbinger of underground water.42 • A highway contractor asserted a claim for extra compensation and time based on the type of excavation material it encountered. In rejecting the contractor’s claim, the Board of Claims found, inter alia, that although the contractor’s personnel inspected the project site, they took no soil borings, conducted no subsurface investigation, and reviewed neither the government’s engineering consultant’s report nor the available soil borings. Further, the calculations the contractor used in bidding the project did not account for other

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operations that might affect the earth-moving project; the contractor did not consider the moisture content of materials in formulating the bid and did not plan on drilling and shooting the rock; and the contractor’s estimate for the project did not account for any equipment, trucks, or loaders for rock excavation. Essentially, the contractor’s inadequate prebid site inspection caused it to underestimate the difficulty of the work.43

3.7.3. Disclaimers for Differing Site Conditions These are some examples of disclaimer provisions found in various contracts: • The owner makes no representation and denies any responsibility for the accuracy of any subsurface data furnished and expects each bidder to satisfy itself as to the character, quantity, and quality of subsurface materials to be encountered. • The estimated quantities set forth in the contract are not guaranteed and/or are provided solely for purposes of determining approximate amounts or for making estimates. • The subsurface data furnished to bidders do not constitute a part of the contract and are furnished solely for information. • The bidders must make their own investigations as to subsurface conditions, and no claim for additional compensation will be allowed regardless of the subsurface conditions actually encountered. • “The bidder shall examine carefully the site of the work and the plans and specifications therefor, and shall satisfy himself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered. He shall receive no additional compensation for any obstacles or difficulties due to surface or subsurface conditions actually encountered.”44 • “Where investigations of subsurface conditions have been made by the State in respect to foundation or other structural design, and that information is shown in the plans, said information represents only the statement by the State as to the character of material which has been actually encountered by it in its investigation and is only included for the convenience of bidders.”45 • “Investigations of subsurface conditions are made for the purpose of design, and the State assumes no responsibility whatever in respect to the sufficiency or accuracy of borings or of the log of test

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borings or other preliminary investigations, or of the interpretation thereof, and there is no guaranty, either expressed or implied, that the conditions indicated are representative of those existing throughout the work : : : .”46 • “Making such information available to bidders is not to be construed in any way as a waiver of the provisions of the first paragraph of this article, and bidders must satisfy themselves through their own investigations as to conditions to be encountered. : : : ”47 • “If tests have been made by the State of other locations in the vicinity, the results : : : are available to the Contractor or to prospective bidders on inquiry at the office of the district in which the work is situated : : : . This information is furnished for the Contractor’s or the bidder’s convenience only, and the State does not guarantee such tests and assumes no responsibility whatsoever as to the accuracy thereof or the interpretation thereof stated in the test records : : : .”48 • “The bidder shall examine carefully the site of the work : : : . It will be assumed that the bidder has investigated and is satisfied as to the conditions to be encountered, as to the character, quality, and quantities of the work to be performed and materials to be furnished and as to the requirements of these specifications, the special provisions, and the contract.”49 The site investigation clause of the FAR, which follows the aforementioned differing site conditions clause, states that “[t]he government assumes no responsibility for any conclusions or interpretation made by the contractor based on the information made available by the government. Nor does the Government assume responsibility for any understanding reached or representation made concerning conditions which can affect the work by any of its officers or agents before the execution of this contract, unless that understanding or representation is expressly stated in the contract.”50 No universal rule exists with respect to the enforceability of provisions similar to those previously set forth. Generally speaking, the courts will take into account these provisions and the differing site conditions encountered, examine the facts of the case, determine the diligence and reasonableness51 of the contractor’s acts, and decide. One California court would not even allow into evidence the contract’s disclaimer provisions. The excluded clause states, “It is the sole responsibility of the Contractor to evaluate the jobsite and make his own

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technical assessment of subsurface soil conditions for determining the proposed drilling process and equipment and make his own financial impact assessment, prior to bidding. The District makes no guarantees for the soil report’s accuracy, findings or recommendations. The District will make no additional compensation or payments, nor will it accept any claims if the subsurface soil conditions are different than that assumed by the Contractor.”52 At times the government or owner will use such a clause to deny a differing site conditions claim on the premise that the site conditions were not misrepresented. In the private sector, more than in the public sector, where (1) positive misrepresentation upon which the contractor reasonably relied is absent, (2) a clause in the contract clearly relieves the owner of extra costs resulting from differing site conditions, and (3) an opportunity exists to conduct a site investigation and to inspect the plans and specifications and other relevant documentation before submitting a bid, the court is more likely to deny a differing site condition claim, depending upon the particular facts of the case.53

3.7.4. Representations of Conditions Again, court rulings differ on whether disclaimers; exculpatory or other limiting language; or provisions that state that data made available are for the contractor’s information only, not intended as representations or warranties, and thus not incorporated into the contract, prevent such items as soil reports, boring data, as-built drawings, and other items referenced to be binding on the owner. Often, the issue falls on whether misrepresentation or failure of disclosure was intentional. The flip side of the issue is whether any of the information is binding on the contractor because of the disclaimers as to the accuracy of the information. Gordon H. Ball, Inc.54 is an example of the latter, where subsurface information was referenced and available in the contract, but was not binding on the contractor because of a disclaimer clause. The disclaimer clause stated, “Information and data referred to below are furnished for the Contractor’s information and for whatever use the Contractor may find therefor. The subsurface and other physical data such as those mentioned herein and contained in the Contract Documents, or otherwise made available to the Contractor by the Authority, are not intended as representations or warranties. It is expressly understood that the Authority will not be responsible for the completeness or accuracy thereof nor for any deductions, interpretations, or conclusions drawn

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therefrom.” The board stated that in view of the strong disclaimers on the accuracy of the information and the referenced information not being expressly “contained in the Contract Documents,” the contractor was under no obligation to seek out and examine the information. Making the information part of the contract would have been a simple matter.55 Some might also argue that any disclaimer in a contract does not alleviate the contractor’s responsibility to seek clarification where subsurface conditions might be ambiguous. In Delcon Construction v. U.S.,56 the owner provided boring logs, for information only, that indicated the presence of rock, but nothing else in the contract documents either confirmed or denied whether rock excavation was part of the contract. In this case, the court found that the bid documents “contained a patent ambiguity as to whether the contract required rock excavation,” that the [contractor] had a duty to clarify the ambiguity, and that the contractor failed to fulfill that duty adequately. Therefore, the risk of misinterpreting the contract requirements fell on the contractor.57

3.8. Summary and Checklist When a contractor prepares its bid or proposal on a construction contract, it should do the following: 1. Review every available piece of paper and physical evidence before finalizing its bid, including the project site, soil data, geological, and other technical reports; soil and boring reports; prior as-built drawings; former contractor reports, etc. The list of the types of possible information available to the contractor is tremendous, and each project provides a new set of information to review. 2. Conduct a thorough and methodical site investigation. In that regard, the contractor should approach the site investigation as if already awarded the contract and as if it were the first week of the project. Every bit of information that will influence planning and performance of the contract should be recorded. These records should include sketches and photographs of the jobsite. Ideally, the principals who will be involved in managing and estimating the project should participate in the site investigation. Appendix 3A contains a “Site Investigation Report” form for use in documenting observations and to serve as a checklist when conducting a site investigation. In addition to aiding the contractor in preparing a

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bid and planning the work, the site investigation (and bid estimate) can play a crucial role in claims situations. For example, the bid estimate work method and price are sometimes used as a standard of reference to evaluate the impact of changed conditions. 3. Ask questions and use the owner’s preferred approach, be it requests for information (RFIs) or requests for clarification (RFCs), prebid, to clarify any and all concerns regarding the condition of the project site, including when the contractor may have additional knowledge of the site, having performed work in the past, and the accuracy or inaccuracy of the contract documents. 4. Review and evaluate both the differing site conditions provisions and any disclaimer or exculpatory provisions in the proposed contract and make a risk assessment based on those contract provisions. 5. If in a competitive bid situation, do not include in the bid a contingency for a potential encounter with an unknown and unexpected differing site condition. If the bid includes that contingency, the contractor risks not being low bidder, especially if the contractor has performed due diligence and assessed the site condition as a part of its estimating process. When a contractor encounters a situation that appears to represent a differing site condition, the contractor should 1. Immediately put the owner on notice of the issue, even before the contractor has completed its investigation and assessment of the differing site condition. 2. Determine whether the condition was the recognized and usual physical condition of the site. 3. Identify the exact physical condition that the contractor encountered. 4. Evaluate whether the physical condition differed from known and usual conditions and from the plans, specifications, and other contract documents or information available before contracting. 5. Determine whether work in conjunction with the physical condition caused a material increase in the cost or time of performance. If the answer to all these questions is in the affirmative, the contractor likely has a claim for a differing site condition and should immediately consult the contract for the differing site conditions provision and the procedures required to obtain appropriate compensation for such differing site conditions.

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Appendix 3A Site Investigation Report Form This outline is for use as a general guide in preparing for and conducting a site visit. It is not all-inclusive and should be supplemented for the specific type of construction your company performs. (Use a separate page if more room is required to complete the form.) 1. Name of project ___________________________________________________________ Owner ___________________________________________________________________ Lender ___________________________________________________________________ Location of project _________________________________________________________ Bid date __________________________________________________________________ Date and times site is available for visit ______________________________________ 2. Date of visit(s) _____________________________________________________________ 3. Site demographics and access: Nearest city _____________ Distance to this city _______________________________ Highways (describe road access, including any bridge or road restrictions, along with seasonal limitations; if haul roads are involved, include a full description on a separate page) _____________________________________________________________ Railroads (describe type and location of loading/unloading locations) __________________________________________________________________________ Airports (nearest; include commercial services available) __________________________________________________________________________ Water (describe river or ocean access, harbors, channel depth, etc., including commercial carriers) __________________________________________________________________________ 4. Utilities: a. Power company (name, address, telephone, and capacities) _______________________________________________________________________ b. Telephone company (name, address, telephone, and capacities) _______________________________________________________________________ c. Gas company (name, address, telephone, and capacities) _______________________________________________________________________ d. Water and sewer company (name, address, telephone, and capacities) _______________________________________________________________________ e. Cable company (name, address, telephone, and capacities) _______________________________________________________________________ 5. Staging, storage, housing, and trailer facilities (location, availability, and cost) __________________________________________________________________________ 6. Working season (typical weather patterns, seasons, and conditions) __________________________________________________________________________ 7. Local trade association chapters: a. Names, addresses, and telephone _______________________________________________________________________

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8.

9.

10.

11.

12.

13.

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b. Information on unusual working conditions, labor availability, union contacts, pay scales, benefits, etc. _______________________________________________________________________ Local subcontractors or suppliers: Refer to the bid schedule and prepare a separate list of subcontractors and suppliers. Obtain local/regional directories/websites to begin making contacts. Visit owner’s facilities a. List names, titles, and telephone numbers of persons contacted: Name _________________________________________________________________ Title ___________________________________ Phone _________________________ Name _________________________________________________________________ Title____________________________________ Phone _________________________ b. Prebid jobsite walk: Prepare a list of items to discuss with the owner during the jobsite walk. Include items such as general job requirements, questions about the drawings and specifications, local geology, groundwater situation, availability of special reports, photos, maps, boring logs and other data (obtain copies) both referenced and not referenced in the contract documents, local environmental regulations, safety requirements, and easements. c. Request conducted tour of proposed work. d. Confirm ability to tour jobsite after initial prebid jobsite walk. e. Examine all cores, test locations, and logs of test holes available. Prepare any and all necessary requests for information (RFIs) or requests for clarification (RFCs) for submittal to the owner in sufficient time to receive and review responses and incorporate them into the bid. __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ Describe site. Take photographs. Compare and note both similarities and differences of observations at the site with those specified in the contract drawings and specifications. __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ Initiate site preparation estimate (including location of facilities, foundations, drinking water, etc.). __________________________________________________________________________ __________________________________________________________________________ Determine any special conditions that will enhance or prevent usage of special equipment. __________________________________________________________________________ __________________________________________________________________________

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Endnotes 1. Tennessee Valley Auth. v. Hill, 437 U.S. 153 (1978) (snail darter). 2. Reliance Ins. Co. v. County of Monroe, 604 N.Y.S.2d 439 (1993) (toxic and hazardous creosote leaking into tunnel beneath riverbed where contractor was installing sewer pipe). 3. Federico Co. v. New Bedford Redevelopment Auth., 723 F.2d 122 (1st Cir. 1983) (contractor constructing earth-filled bulkhead piers including required excavation encountered undisclosed ducts, electrical material, and abandoned concrete; owner had report of obstructions but did not report them to contractor). 4. Washington State Department of Transportation and Seattle Tunnel Partners 2015 dispute over TBM Bertha’s encounter with an 8-in. steel well casing on the Alaskan Way Viaduct Replacement Project in Seattle, Washington. 5. Ray D. Bolander v. U.S., 186 Ct.Cl. 398 (1968) (higher moisture content in soils to be compacted than expected). 6. Stock & Grove, Inc. v. U.S., 493 F.2d 629 (Ct.Cl. 1974) (failure of designated quarry to produce specified armor stone for roadway edge); see also, Tobin Quarries, Inc. v. U.S., 114 Ct.Cl. 286 (1949) (failure of designated borrow pits or quarry sites to produce requisite rock). 7. Jefferson Const. Co. v. U.S., 183 Ct.Cl. 720 (1968) (foundation pad depth far in excess of what core boring test samples of area immediately adjacent to foundation pads locale indicated, but contract provided for equitable adjustment and time extension for that potential); General Casualty Co. v. U.S., 130 Ct.Cl. 520 (1955) (borings did not indicate the existence of shale subsurface). 8. United Contractors v. U.S., 177 Ct.Cl. 151 (1966) (unexpected excessive underground water encountered in connection with installation of concrete tunnels). 9. Woodcrest Const. Co., Inc. v. U.S., 187 Ct.Cl. 249 (1969) (core boring logs suggested no unusual subsurface conditions that would require extensive pumping and dewatering operations). 10. Paul E. McNulty, “Changed Conditions and Misrepresentation Under Government Construction Contracts,” Government Contracts Monograph No. 3 (published by the Government Contracts Program, the George Washington University, 1975), 21–22; see also, Gregory H. McClure, Differing Site Conditions: Evaluating the Material Difference, 15 PUB. CONT. L.J. 138, 139–40 (1984); Jeffrey M. Chu, Differing Site Conditions: Whose Risk Are They? 20 CONSTR. LAW. 5 (2000); Carol J. Patterson, The View from the Starting Line: Assessing Contractual Barriers to Contractors’ Claims, presented at ABA Forum on the Construction Industry Midwinter Program: Getting to the Bottom of Construction Claims, Jan. 30, 2003, New York; Kenneth M. Cushman, et al., Drafting Construction Contracts and Handling Construction Litigation 1993: Preparing for the "New" Public and Private Works, Contractor's Rights and Duties: Bid Disputes and Associated Problems, Differing Site Conditions and Site Inspection Clauses, Change Orders, and Contract Technical Defenses, 391 PLI/Real 61 (1993). 11. FAR ¶52.236-2.

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12. American Institute of Architects (AIA) A201™ – 2007 General Conditions of the Contract for Construction. 13. ConsensusDocs 200 – Agreement and General Conditions Between Owner and Constructor (Lump Sum). 14. Standard General Conditions of the Construction Contract (2007), C-700, ¶¶ 5.02 and 5.03, prepared by Engineers Joint Contract Documents Committee. Issued and published jointly by National Society of Professional Engineers (NSPE), American Council of Engineering Companies (ACEC), ASCE, and the Construction Specifications Institute (CSI). 15. 248 U.S. 132 (1918). 16. E.H. Morrill Co. v. California, 65 C.2d 787 (1967). 17. Iacobelli Const., Inc. v. County of Monroe, 32 F.3d 19 (2d Cir. 1994). 18. Foster Const. C.A. & Williams Bros. Co. v. U.S., 435 F.2d 873 (Ct.Cl. 1970) (contractor, justifiably relying on drill hole logs and design details and directions, expected firm and stable conditions with bearing capacity and relatively impermeable soil for dewatering of cofferdam by pumping, thereby permitting excavation “in the dry”); but see, Umpqua River Navigation Co. v. Crescent City Harbor Dist., 618 F.2d 588 (9th Cir. 1980) (contractor unable to collect for overruns incurred while dredging boat basin because unreasonable to rely on owner’s test holes on beach near site and underwater borings at breakwater surrounding boat basin but not in dredging channel, subject of contract); NDG Constructors, ASBCA No. 57328, 12-2 BCA ¶ 35,138 (geotechnical reports indicating soft wet soils and possible groundwater, but excavation possible with conventional excavation/dewatering equipment, contained disclaimer that subsurface conditions between boring locations could differ from boring locations. ASBCA found soil profile, soil characteristics, and moisture content not differing site condition because above warning in reports, soil and moisture content not materially different from information in contract documents, and additional moisture caused by manner in which contractor performed tunneling operation). 19. Morrison-Knudsen Co. v. U.S., 397 F.2d 825 (Ct.Cl. 1968) (bid documents indicated location and availability of substantial quantities of borrowed subgrade material and selected borrow surface course material based on field engineering surveys and material studies but borrow material provided unavailable during actual construction); but see Wunderlich v. State of California, 65 C.2d 777 (1967) (binding contractor, which encountered inadequate supply of material at location provided by owner, to following provision: “When sources of materials to be furnished by the Contractor are designated in the special provisions, the Contractor shall satisfy himself as to the quantity of acceptable material which may be produced at such locations, and the State will not assume any responsibility : : : as to the quantity of acceptable material at the designated location.”); see also, Youngdale & Sons Constr. Co. v. U.S., 27 Fed. Cl. 516 (1993). 20. American Structures, Inc. & Mining Equipment Manufacturing Cooperation, ENGBCA 3408 75-1 BCA ¶11,283 (brick and mortar sewer differed materially from brick and concrete sewer indicated on contract drawings, forcing contractor to replace portion of sewer over tunnel rather than leaving sewer in as-is condition and tunneling under it without special support); also see Green Construction Co. v. Kansas Power & Light Co., 1 F.3d 1005 (10th Cir. 1993) (contract

Differing Site Conditions

21. 22. 23. 24. 25. 26.

27. 28.

29.

30.

31.

32.

33. 34.

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disclaimed owner’s responsibility for accuracy of site condition information by instructing bidders to make own investigation warning that there would be no future adjustment in price for unforeseen conditions). Appeal of Minter Roofing Co., Inc., ASBCA No. 31137 (Aug. 24, 1989). Moorhead Construction Co., Inc. v. City of Grand Forks, 508 F. 2d 1008 (8th Circuit, 1975). LAUSD v. Great American Ins. Co., 49 Cal. 4th 739 (2010). Int’l Tech. Corp. v. Winter, 523 F.3d 1341 (Fed. Cir. 2008). Weeks Dredging & Constr., Inc. v. U.S., 13 Cl.Ct. 193 (1987); Weston/Bean Joint Venture v. United States, 115 Fed. Cl. 215 (2014). Id. See also P. T. & L. Construction Co. v. State of New Jersey, Department of Transportation, 5-31 A.2d 1330 (N.J. 1987) (project owner may be liable if information provided is false or incorrect or if it withholds from contractor information that is not available from other sources). Id. Farnsworth & Chambers Co., Inc. v. U.S., 171 Ct.Cl. 30 (1965) (contractor completing and dewatering cofferdam encountered subterranean cavern that core borings did not disclose). Western Well Drilling Co. v. U.S., 96 F.Supp 377 (N.D.Cal. 1951) (well drilling contractor, experienced, well-equipped, and competent, having studied government specifications/general geological conditions, entitled to recovery when unable to drill water well at specified depth because of rock formations). Charles T. Parker Constr. Co. v. U.S., 433 F.2d 771 (Ct.Cl. 1970) (contractor not entitled to added compensation in response to complaint about hardness and abrasiveness of rock and effect upon drilling costs, including blasting of rock and extensive drilling of holes for explosives, because conditions were generally recognized and usual in geographical area). Perini Corp. v. U.S., 180 Ct.Cl. 768 (1967) (government asserted differing site condition in attempt to escape quantities contract alleging unusual amount of water—court rejected government’s argument); Leal v. U.S., 149 Ct.Cl. 451 (1960) (contractor’s minimal check for groundwater in face of warning signs in specifications and drawings precluded recovery for differing site conditions). Hallman v. U.S., 80 F.Supp. 370 (Ct.Cl. 1948) (court rejected differing site condition claim that after contract executed, traffic regulation on project site requiring automobiles to stop when troops moving in streets slowed down contractor and increased performance costs holding changed conditions apply to changed physical conditions, not changed governmental, political, or economic conditions). Vann v. U.S., 420 F.2d 968 (Ct.Cl. 1970). Turnkey Enterprises, Inc. v. U.S., 597 F.2d 750 (Ct.Cl. 1979) (contractor’s operations required water for compacting earth, controlling dust, hydromulching, and screening plant activities but anticipated water supply from nearby river dried up because of drought conditions); Lenry, Inc. v. U.S., 156 Ct.Cl. 46 (1962) (flood that prevented contractor’s use of city streets for access to the construction site); Hardeman-Monier-Hutcherson v. U.S., 198 Ct.Cl. 472 (1972) (alleged sea conditions encountered in construction of pier intertwined with weather conditions); Security National Bank v. U.S., 184 Ct.Cl. 741 (1968) (excessive rain flooded

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35. 36. 37.

38. 39. 40. 41. 42.

43. 44. 45. 46. 47. 48. 49. 50. 51.

52. 53.

54. 55. 56. 57.

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highway contractor’s low water crossing and quarry); Carman v. U.S., 143 Ct.Cl. 747 (1958) (flood required contractor to reclear area it had already cleared under contract); Bateson-Stolte, Inc. v. U.S., 305 F.2d 386 (Ct.Cl. 1962) (increased wages because owner (U.S. government) had huge project in vicinity of contractor’s project, drawing labor from the contractor’s project, increasing labor costs). Olympus Corp. v. U.S., 98 F.3d 1314 (Fed. Cir. 1996). John A. Johnson Contracting Co. v. U.S. 132 Ct. Cl. 645 (1955). Phillips Construction Co. v. U.S., 184 Ct. Cl. 249 (1968); also see Appeal of Peterson Construction Co., Inc., ASBCA No. 44197 (Nov. 12, 1992) (groundwater exceeded quantity indicated in contract, complicating dewatering activities, found to be differing site condition). Stuyvesant Dredging Co. v. U.S., 834 F.2d 1576 (Fed.Cir. 1987). Commonwealth of Pennsylvania DOT v. Mitchell’s Structural Steel Painting Co., 336A2-913 Commonwealth Court of Pennsylvania (1975). Hunt and Willett, Inc. v. U.S., 168 Ct.Cl. 256 (1964). Archie and Allan Spiers, Inc. v. U.S., 155 Ct.Cl. 614 (1961). Randa Madison JV, III v. Dahlberg, 239 F.3d 1264 (Fed. Cir. 2001); see also Flippin Materials Co. v. U.S., 160 Ct.Cl. 357 (1963) (contractor failed to review actual cores or field logs of borings, just examined drawings of the profiles). Green Construction Co. v. Department of Transportation, 643 A.2d 1129 (Pa.Cmwlth. 1994). E.H. Morrill Co. v. California, 65 C.2d 787 (1967). Id. Id. Id. Wunderlich v. State of California, 65 C.2d 777 (1967). Id. FAR ¶52.236-3. Metropolitan Sewerage Commission v. R.W. Construction, Inc., 241 N.W 2d 371, (1976) (contractor held to reasonableness standard drawing conclusions “which any reasonable contractor should have anticipated : : : derived from a blend of his past experience, the customs and insights shared generally by contractors in the area, and the information conveyed by the contract”; also see, Weeks Dredging and Contracting, Inc. v. United States, 13 Cl. CT. 193 (1987) (contractor drew unreasonable conclusions from the soil boring logs). Condon-Johnson & Associates v. Sacramento Municipal Utility District, 149 Cal. App.4th 1384 (2007). John S. Martel and Bruce R. Macleod, “Defenses in Construction Litigation” in Construction Contracts, 1976, ed. Jotham D. Pierce, Jr. (New York: Practising Law Institute, 1976). Gordon H. Ball, Inc. ENGBCA No. 3563, 78-1 BCA. ld. Delcon Construction v. U.S., 27 Fed. Cl. 634 (1993). ld.

Chapter 4

Interpretation and Requirements of Contract Specifications Brian W. Bennetta and Jonathan M. Blockerb

4.1. Introduction Several aspects of contract problem areas are frequently responsible for claims and change order situations, including contract interpretation, defective specifications, duty to seek clarification, duty to inform, duty to proceed, and inspection and duty to inspect. All these items are encompassed by the changes clause of the Federal Acquisition Regulation (FAR) and are generally addressed by a changes clause in private construction contracts. These problems arise from different interpretations of contract provisions, different experiences in method or manner of construction procedures, and divergent objectives of the owner and contractor. Of course, the objective of the contractor and the owner is to have a structure erected in a workman-like manner and at a reasonable price, but the size and complexity of today’s construction projects hardly leave time or space to pin down all details. Each contractor and each owner will probably interpret any given situation differently. However, over time, standard interpretations of these situations have evolved through repeat encounters of these situations. This chapter reviews various a

Founding Partner, Bennett Legal Group, P.A. Associate, Christian & Small LLP.

b

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contract interpretation dispute situations and describes some methods used to settle them. Please note that this book refers to the longstanding concepts of contract interpretation as rules. They are designated rules because some courts, such as the Federal Court of Claims, will uniformly apply them. However, other courts and tribunals (state courts, arbitrations, or other federal courts) may not apply the rules with the same uniformity or consistency. Every owner and contractor can recount legal disputes wherein the judge or arbiter seemingly disregarded these concepts, ruling against them. Therefore, owners and contractors should always support their legal positions with current court decisions, preferably decisions published by the court or tribunal overseeing the contract dispute.

4.2. Rules of Contract Interpretation 4.2.1. Background Over the years, a set of rules has been developed to assist in the interpretation of construction contracts. The Contract Appeals Board and various courts frequently use these rules as guidelines for developing sound, consistent judgment on problems of contract interpretation. Many of these rules originate from legal principles and concepts detailed in the Restatements of the Law of Contracts, both the first and second editions, published by the American Law Institute.1

4.2.2. Reasonableness The principle of reasonableness is prominent in contract analysis. Contract terms, provisions, and specifications are often open to varied and competing interpretations, with each party to the contract advocating the appropriateness of its interpretations. A specification might be intended to have a restricted meaning, but unless that meaning is clearly expressed, the other party to the contract cannot readily infer the single interpretation the contract is supposed to express. The board or court reviewing a contract dispute is tasked with deciding if a specification has a singular, more predominant interpretation, or if several viable interpretations are acceptable. A court generally chooses the most reasonable meaning under the circumstances to govern the contract.

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When applying a reasonableness standard to contract interpretations, courts generally consider what the contractor understood as a reasonable construction contractor.2 This is “the meaning that would be attached to the language by a reasonably intelligent bidder : : : who would be expected to have the technical and trade knowledge of his industry and know how to read and interpret technical engineering specifications and perform construction work in accordance with such specifications.”3 The subjective intentions of the party drafting the contract, if not expressed in the contract or in contract negotiations, are ignored by the courts.4 “A government contractor cannot properly be required to exercise clairvoyance in determining its contractual responsibilities.”5 A reasonable construction contractor is expected to find and resolve ambiguities prior to bid time. Although a contractor need not resolve any and every ambiguity prior to bidding, when the contractor is “presented with an obvious omission, inconsistency, or discrepancy of significance, he must consult the government representatives if he intends to bridge the crevasse in his own favor.”6 Courts urge contractors to resolve ambiguities of contract terms or specifications when the contract is not sufficiently clear. If such ambiguities are resolved in accordance with the contractor’s reasonable interpretation prior to bid time, then the reviewing board or court will uphold this interpretation.7 A contractor should remember that courts will not automatically agree with a party who possesses long years of practical experience and technical knowledge. Too often these credentials “bear nothing more fruitful than poor draftsmanship or contrived analysis.” 8 “[T]he language of a contract must be afforded the meaning derived from the contract by a reasonably intelligent person acquainted with the contemporary circumstances. : : : The unexpressed, subjective, unilateral intent of one party is insufficient to bind the other contracting party, especially when the latter reasonably believes otherwise.”9

4.2.3. The Contract as a Whole If contractors cannot derive a reasonable interpretation from a specification on its own merit, then they must seek assistance from other sources, preferably from within the contract documents. The Restatement (Second) of Contracts asserts that the contract must be read as a whole.10 This rule requires that the contractor not take an interpretation out of context in

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one part of the specification when that specification is modified or clarified in another part of the contract. Courts prefer to interpret the provisions of a contract as coordinating and not contradicting each other.11 Contractors are on notice that in reading contracts they should not seek to create ambiguity between the terms and specifications where none should exist.12 If a part of a specification is interpreted so that its inclusion in the contract would render it meaningless, chances are that interpretation would itself be meaningless. If their language reasonably permits, potentially conflicting provisions should be assigned meanings that will harmonize them rather than make them discordant. Furthermore, a provision directed to a particular matter prevails over one that is general in its terms.13

4.2.4. Language The Restatement (Second) of Contracts establishes two primary principles for evaluating contract language. First, where language has a general prevailing meaning, it is interpreted in accordance with that meaning.14 Second, technical terms and words of art are given their technical meaning when used in a transaction within their technical field.15 Both rules apply to all language in a contract unless the contracting parties manifest a different intention regarding any definitions.16 In addition to these guiding principles, courts have developed a three-step method for evaluating contractual language. First, clear, unambiguous language will be read, defined, and interpreted strictly in accordance with the plain meaning of the words as they appear in the contract documents.17 Second, when terms are unclear but the intentions of the contracting parties can be discerned, the court’s ultimate goal is to give full force and effect to the expressed or implied intentions of the contracting parties.18 Third, the court will not ascribe meaning to contractual language that is neither stated, expressly or by implication, within the four corners of the document nor supported by the factual context in which the contract was drawn or executed.19 All three steps attempt to limit the court’s analysis to the four corners of the contract documents for clues to interpreting the contract language. In a well-known and often cited case, Hol-Gar Mfg Corp. v. U.S., the Court of Claims established that contract terms should not be read and interpreted in isolation from the rest of the contract documents.20 The

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court asserted a reviewing board or court must examine the four corners of the contract document to ascertain a word’s true meaning.21 The court is then to give language its ordinary and commonly accepted meaning unless it is shown the parties intended otherwise.22 Any interpretations that give a reasonable meaning to all parts of an instrument will be preferred to one that leaves a portion of it useless, inexplicable, inoperative, void, insignificant, meaningless, or superfluous.23 The court noted that punctuation is a fallible standard by which to interpret contract writing and therefore should be resorted to last, when all other means of analyzing the language fail.24 If a contractor can gather sufficient and reasonable meaning from one part of the contract, he or she is not expected to look elsewhere and determine whether alternative meanings might exist in unlikely parts of the contract. Thus, this rule of interpretation was not held against a contractor who reasonably inferred information on one sheet of plans was sufficient for bid takeoff and did not seek further clarification on other drawings.25 Additionally, contracts commonly address the possibility of internal discrepancies, stating, for instance, that in the event of a conflict the specifications will govern the drawings. Contractors are entitled to rely on these clauses when interpreting the contract documents.26

4.2.5. Custom or Usage Trade custom or usage can be used to ascribe meaning to words if such meaning appears to be the intent of the contract, whether or not the ordinary meaning is ambiguous.27 Courts have held that trade custom and usage in the business community within which the agreement was framed is a factor to be considered in ascertaining the meaning intended for a contractual provision.28 This consideration, though, requires at least one party to establish that a discrepancy exists in the contract language wherein a term has a different meaning within trade or custom from the ordinary or prevailing meaning.29 A court will attribute and presume knowledge of trade custom and usage to a party when evidence shows the usage is an established, well-defined, and well-recognized one.30 If a party can show through evidence the intent of the parties to the contract and a match between these intentions and established trade norms, then the language of a contract will be given effect according to its trade meaning notwithstanding that it is unambiguous in its ordinary meaning.31

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In W.G. Connell Co. v. U.S., the Court of Claims held it was legal error for a review board to ignore trade practice and custom when the board held the contract language was unambiguous.32 The court asserted trade custom and usage can be used to explain or define contract language.33 However, trade custom and usage cannot be used to vary or contradict the contract language.34

4.2.6. Parol Evidence Rule The Parol Evidence Rule provides that oral agreements cannot be used to vary, contradict, or add to the terms of a written agreement.35 The rule seeks to prevent the variance of written agreements by inconsistent contemporaneous or prior oral terms.36 The rule does permit statements from oral negotiations or communications prior to the contract’s formation to be used to interpret or give meaning to ambiguous or uncertain contract terms.37

4.2.7. “Against the Drafter” When both contract parties reasonably interpret terms of the specification and some ambiguity remains as to the intent of the terms, the boards and courts will rule against the drafter of the document.38 In some courts, this principle is known as contra proferentem.39 It is a rule of last resort for interpreting contract terms and specifications.40 The doctrine pushes the drafters of government contracts toward improving contractual forms and saves contractors from hidden traps not of their own making.41 Demonstrating that the contractor’s interpretation is the only justifiable or reasonable one is not necessary.42 A specification susceptible to more than one interpretation consistent with the contract’s language and the parties’ objectively ascertainable intentions becomes convincing proof of an ambiguity; the burden of that ambiguity falls solely upon the party who drew up the specifications. However, this doctrine applies when the ambiguities in language are latent only.43 In effect, the government assumes the risk for latent ambiguity, lack of clarity, or absence of proper warning in contracts it drafts.44 However, the rule has an exception. Where both parties to a contract are sophisticated businesspersons advised by counsel and the contract is a product of arms-length negotiating, no reason exists to automatically construe the contract documents against the government drafter.45

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4.2.8. Conduct Provisions in Restatement (Second) of Contracts § 202 deal with the parties’ actions as lending weight or new meaning to a contract interpretation. The actions and conduct of parties in performing a contract are highly relevant in determining the parties’ intent.46 Prior course of dealings, actions on other contracts, and conduct of the parties during the performance of the instant contract can establish conduct.47 The importance of a prior course of dealing reaches its zenith in instances where the experience on past contracts is allowed to substantially modify or, perhaps, contradict the plain language of the contract. In L.W. Foster Sportswear Co. v. U.S., the contractor had never been able to meet the strict requirements of the specifications and had, under a series of prior contracts, received certain necessary deviations. The Court of Claims held that the contractor was entitled to rely on its understanding of what would be acceptable even though there were slight differences in the inspection standards in the instant contract and even though the procuring agency had changed.48

The contractor can essentially rely on his or her own previous dealings with identical contracts to establish an interpretation. However, when relying on similar work being performed by other contractors, it must be shown that the other parties were aware and accepting of the situation. If the other contracts had circumstances peculiar to those contracts, or if the contracting officer of the current contract was unaware of the interpretations underlying those prior contracts, then the rule of conduct may not apply. In other words, what may hold for one contractor and owner on a contract may not apply to a similar contract between another contractor and owner. The conduct of the parties during performance of the contract usually establishes a precedent of contract interpretation for later disputes. In Maxwell Dynamometer Co. v. U.S., the Court of Claims stated that the government was bound by the interpretation adopted by the contractor when the government became aware of the interpretation and its contract representatives said nothing.49 Either of two conclusions can be reached from the government’s actions. One is that the government’s officials at these tests

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interpreted the contract in the same manner as (the contractor) and though the contract required that speed be measured from the power roller, the Clayton dynamometer at Newport notwithstanding. Since great weight is given to the practical interpretation of a contract by the parties to it before the contract becomes the subject of controversy, if such is the case, then it reinforces (contractor’s) interpretation of the specifications. : : : The other conclusion is that the representatives of the Government were aware (that contractor) was reading the contract specifications more stringently than required, but that they said nothing, possibly in the hope that (contractor) would be able to meet this more demanding standard. Such action is unconscionable and would not serve to defeat (contractor’s interpretation).50

If an interpretation of an element of work is to be disputed, it should be done as soon as it is recognized or becomes known. If a contractor is performing work under one interpretation, then decides that a new interpretation is more correct and wants to claim extra costs of performing the original work, he or she may be denied such extra costs. “The interpretation of a contract by the parties to it, before the contract becomes a subject of controversy, is deemed by the court to be of great, if not controlling weight. It is a canon of contract construction that the interpretation placed by the parties on a contract during its performance is demonstrative of their intentions.”51

4.3. Defective Specifications 4.3.1. Introduction The existing body of law dealing with defective specifications finds its origin in the landmark case of U.S. v. Spearin. This decision established the precedent that, where the government issues detailed specifications, the government implies a warranty that the finished product will perform as required. The case states that “if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications.”52

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Although the government sometimes rightfully puts the contractor on notice of potential errors in the specifications, the government cannot necessarily avoid liability through the use of exculpatory language. For example, the common requirement for the contractor to verify all dimensions and conditions prior to submission of bid does not require the contractor to verify accuracy and to interpret every possible error.53 Contractors are businessmen usually pressed for time and consciously seeking to underbid competitors. Consequently, they estimate only those costs which they feel the contract terms will permit the government to insist upon in the way of performance. They are not expected to ferret out hidden ambiguities or errors in the bid documents and are protected if they innocently construe in their own favor an ambiguity equally susceptible to another construction or overlook an error.”54

The realm of defective specifications, in addition to obvious cases of design defects, encompasses suitability or availability of designated materials, practicality or possibility of performance, and duty to disclose knowledge or information pertinent to the performance of the contract. The following four sections briefly discuss these aspects of defective specifications.

4.3.2. Suitability of Designated Methods or Materials While the owner is obligated generally to ascertain the availability of specified materials, the contractor carries the primary responsibility in this area. In preparing a bid, the prudent contractor must assure himself or herself of the commercial availability of required materials. For instance, an owner issuing specifications calling for 500 tons of welded rail may know that the steel mills are in full production and be confident that his needs can be filled at published steel prices. He may not, however, realize that the welding plants are two years behind in their orders. The contractor who has neither qualified his or her bid accordingly nor established his or her own on-site welding capacity will have assumed the risks of resulting material shortages. The owner’s obligation is stronger, however, when specifying performance of designated materials. That is, in specifying a material or its approved equal, the owner implies a warranty that the material will perform and is reasonably available. In a case where a designated

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supplier would not sell to the contractor, the Court of Claims found the contractor not liable for failure to secure the material. Where the government issues an invitation for a procurement item containing a component which is given a purchase description consisting of a brand name product manufactured by a designated company or its “approved substantial equal” : : : , it was improper for the government to cast this burden of advance ascertainment upon bidders without explicitly warning them of the questionable availability or physical makeup of the component.55

Similar to this situation is the specification that describes and clearly allows several alternative methods or materials, and the method or material chosen fails to perform. The implied warranty to perform if the specifications are followed (Spearin v. U.S.) applies to all the alternatives, and the contractor should recover additional costs due to such failures.56 Design deficiencies do not always have obvious causes and effects. Sometimes the end products are usable, but extra costs were still incurred. In Neal & Co. v. U.S., extra allowable costs were incurred to overcome bonding problems of steel plates to concrete in precast panels. The extra costs included hiring a design consultant to monitor the extra work and the extra work in loading, unloading, and installation planning of the panels.57

4.3.3. Possibility and Practicality The Restatement of Contracts defined impossibility to mean “not only strict impossibility but impracticability because of extreme and unreasonable difficulty, expense, injury, or loss involved.”58 Where an event makes a party’s performance impracticable without his or her fault, the nonoccurrence of which was a basic assumption on which the contract was made, his or her duty to render that performance is discharged, unless the contract language or the circumstances indicate otherwise.59 However, performance will not be excused simply because the work is more difficult or expensive than anticipated. The government does not warrant that a method it requires or institutes for the contractor to follow can be pursued without problems or difficulty.60 The “how” and “at what price” are matters for the contractor to handle. The contractor can

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claim breach only if the specified method demands it resort to economically unrealistic measures. Breach does not occur when performance becomes more costly than anticipated.61

4.3.4. Constructive and Cardinal Changes Related to impossibility and/or impracticability are the concepts of constructive and cardinal changes. A constructive change occurs where a contractor performs work beyond the contract requirements, without a formal order under the changes clause, whether by an informal order of the government or by fault of the government.62 A constructive change has two components: (1) change, which is work outside of the contract’s scope of work, and (2) order/fault, which describes the reason why the contractor performed the extra work.63 If the government explicitly or implicitly ordered work outside the scope of the contract or the government is at fault in causing work to be done outside the scope of the contract, then the contractor is entitled to an equitable adjustment of price.64 A cardinal change is a breach of contract that occurs when the government effects a change in work so drastic that it effectively requires the contractor to perform duties materially different from those in the original bargain.65 A cardinal change differs from a constructive change in that (1) it requires work materially different from that specified in the contract and (2) the change amounts to an actual breach of contract.66 The number of changes is not the test to determine whether a cardinal change has occurred.67 Cardinal changes may arise from changes in quantity or from changes in the means or methods of performing the work. A cardinal change does not have to be a single change or several massive changes, but can be the result of many minor changes. The determination of the permissive degree of change can be reached only by considering the totality of the change, including magnitude and quality of the change.68 Cardinal changes, often drastic increases in scope of work and cost, can also be drastic reductions in scope of work under contract, which result in significant reductions in payment for work.69

4.3.5. Disclosure of Knowledge Withholding knowledge of information that might adversely affect contract performance may be held as a defective specification. Failure to disclose inaccuracies about contract provisions, access dates, degree of

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other work, and potential interference can cause otherwise unexpected additional costs for the contractor. However, if the contractor has access to the same information, then knowledge is also imparted to the contractor. The question of disclosure of knowledge is intertwined with problems of what the knowledge is, who has the knowledge, and the common availability of certain types of information. If one party has superior knowledge of pertinent information that might affect performance, he or she is obligated to make known such information, as established in the case of Helene Curtis Industries, Inc. v. U.S.70 In Helene Curtis Industries, the government possessed information superior to that of the contractor about a recently created substance critical to a product’s manufacture—a novel disinfectant that was never mass produced. The government sponsored research product in the government contract, knew more about the product than the bidders, knew the product’s main ingredient was a recent invention, and knew a more costly process would be necessary to grind the substance per the contract’s specifications.71 The Court of Claims reasoned that though the government was not a fiduciary toward its contractors, where balance of knowledge is clearly on its side, the government can no more betray a contractor into a ruinous course of action by silence than by the written or spoken word.72 This duty to disclose vital information is also known as the superior knowledge doctrine.73 However, if knowledge is readily available to both the owner and contractor, then one party cannot be responsible for having withheld knowledge from the other.74

4.3.6. Cost and Notification Aspects Two significant features are attendant to defective specification claims. The first is that the contractor is entitled to receive equitable adjustments for cost incurred from the inception of the claim (the 20-day notice limitation does not apply). The second is that the equitable adjustment shall include any and all increased costs incurred in attempting to comply with the defective specifications. The boards and courts have given liberal consideration to costs in defective specification claims including delay costs. This interpretation is based on the government’s obligation to ensure the adequacy and accuracy of the specifications it has drafted and the owner’s obligation to not hinder the performance of

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the contractor. In Laburnum Construction Company v. U.S., the Court of Claims explicitly stated There is a condition implied in every construction contract that neither party will do anything to hinder the performance of the other party. If faulty specifications prevent completion of the contract, the contractor is entitled to recover damages for the (government’s) breach of its implied warranty. Those damages extend to the costs incurred by reason of the idleness resulting from the mistakes in the plans. The (government) cannot, by errors in the specifications, cause delay in (contractor’s) completion of the work and then compensate (contractor) merely by extending its performance time and by payment of any added direct cost occasioned by changes to correct those errors.75

The significance of this case is that the contractor is entitled to all costs as a result of the defective specifications and avoids the owner’s application of the right to reasonably delay the job while he or she issues a change. It therefore behooves the contractor to claim for delays associated with the change issuance as an action incurring out of a defective specification rather than as a routine change to the contract.

4.4. Duty to Seek Clarification 4.4.1. Obligation to Notify Owner of Errors or Discrepancies The burden to inform the other party of pertinent information rests on both the contractor and the owner. The contractor, because of his or her superior experience with construction methods, is under obligation to notify the owner of glaring errors or discrepancies found both before and after bid. “The bidder who is on notice of an incipient problem but neglects to solve it as he is directed to do so by this contractual preventive-hygiene cannot rely on the principle that ambiguities in contracts written by the government are held against the drafter.”76 The bidder, and thus the contractor, is under an affirmative obligation to “call attention to an obvious omission in a specification and make certain that the omission was deliberate if he intends to take advantage of it.”77 A contractor’s failure to consult a government representative about

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obvious omissions, inconsistencies, or significant discrepancies bars the contractor from recovering for any ensuing damages arising from the error.78

4.4.2. Zone of Reasonableness This rule of law in Beacon is more clearly affirmed in WPC Enterprises v. U.S., which now stands as the prevailing test of the application of the rule.79 If some substantive provision of a government-drawn agreement is fairly susceptible of a certain construction and the contractor actually and reasonably so construes it, in the course of bidding or performance, which is the interpretation which will be adopted. Although the potential contractor may have a duty to inquire about major patent discrepancies, obvious omissions, or drastic conflicts in provisions, he is not normally required, absent a clear warning in the contract, to seek clarification of any and all ambiguities, doubts, or possible differences in interpretations.80

The contractor does not have to seek clarification if its interpretation falls within a “zone of reasonableness,” wherein the contractor innocently construes in its favor an ambiguity equally susceptible to another interpretation (usually held by the government). The Government, as the author, has to shoulder the major task of seeing that within the zone of reasonableness the words of agreement communicate the proper notions—as well as the main risk of a failure to carry that responsibility.81

However, in S.O.G. of Arkansas v. U.S., a contractor based its construction method on a diagram included in the bid documents that was designated as “schematic and for the purpose of estimating only.”82 After the award, when the government directed the contractor to proceed in accordance with the method in the specification, the contractor sued for increased costs over a method he believed he was free to propose by his reading of the contract.83 The Court of Claims, without ruling whose interpretation was correct, stated that the contractor should have sought to clarify the patent ambiguity with a government representative.84 In denying the contractor’s claim, the court concluded

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The rule that a contractor, before bidding, should attempt to have the government resolve a patent ambiguity is a major device of preventative hygiene; it is designed to avoid just such postaward disputes as this by encouraging contractors to seek clarification before anyone is legally bound.85

If the contractor has questions about interpretation or allowable procedures that will have a major impact on his or her construction methods, he or she should ask questions before the bid rather than gamble that his or her assumptions are correct. He or she must weigh the reasonableness of his or her interpretation against the expressed or apparent intent of the contract.

4.4.3. Two-Step Test In Gaston & Associates v. U.S.,86 the court stated the Corps of Engineer’s requirement for separate inspectors for three separate buildings and its refusal to allow the superintendent to also serve as quality control manager were neither clearly specified nor the sole reasonable interpretation of the contract, and the government, as the drafter of the specification, bore responsibility for its misinterpretation. In its decision, the court pointed out that neither party submitted credible evidence of prevailing industry practice as to the quality control manager’s simultaneous performance of additional duties. The contractor supported his argument that the government was capable of clarifying its intention by pointing out similar clauses (and clearly more specific) that existed in the Corps’ own Guide Specification manual. In ruling that “the government cannot make a contractor the insurer of all government mistakes,”87 the court applied the two-step test established in Mountain Home Contractors to determine which party was at fault: • First step: Discrepancy must not be glaring, substantial, and patent. • Second step: The contractor’s interpretation was reasonable.88

The first step provides that the contractor is “obligated to bring to the Government’s attention major discrepancies or errors which they detect in the specification or drawings, or else fail to do so at their peril.” 89 In other words, the contractor has a duty to notify the government of patent ambiguities in the specifications, but not of subtle or minor

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discrepancies, better known as latent ambiguities. If the ambiguity is latent, then the court progresses to the next step.90 The second step concerns the reasonability of the contractor’s interpretation. This is “the meaning that would be attached to the language by a reasonably intelligent bidder. . . who would be expected to have the technical and trade knowledge of his industry and know how to read and interpret technical engineering specifications and perform construction work in accordance with such specifications.”91 The courts ignore the subjective intentions of the party drafting the contract, if not expressed in the contract or in contract negotiations.92 Under this step, the court will embrace a contractor’s reasonable interpretation of a latent ambiguity over the government drafter’s interpretation.93 In Gaston & Associates, the Court of Claims found for the contractor. It determined that the ambiguity in the contract was latent and the contractor’s interpretation of the ambiguity was reasonable. Pursuant to the doctrine of contra proferentem,94 the court held the government must bear the risk of the contractor’s differing interpretation and compensate the contractor accordingly.95

4.4.4. “Not Part of Contract” To summarize the discussions of this section along with those of Section 3.7, “Investigation of the Site and the Plans and Specifications,” the contractor can use but not rely on information that is provided “for information only” and is not expressly contained as part of the contract documents.96 However, if such information raises clear questions or obvious conflicts, it may raise a duty to inquire.97 If references to “for information only” do not say “not part of contract,” it may raise even more of a duty to inquire.

4.5. Duty to Inform Both parties also have an obligation to inform each other of possible problems that may prevent or seriously hinder performance. “If the contractor knows or should know of circumstances indicating that the plans are bound to lead to failure, he has a duty to inform the owner (regardless of the owner’s personal expertise).”98 Likewise, the

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government has a duty to disclose all pertinent information relevant to successful completion of the contract.99 Types of information withheld by the owner that might affect a contractor’s performance that have been ruled the basis of changed conditions in the past are • Discrepancies in the work done on the project by a prior contractor, • Performance of an item in prior tests, • The possibility that only the specified item in an “or equal” specification would meet the government’s requirements, • Full information of the performance of a specified subcontractor, • Problems inherent in a contract specification, • Conditions of a building on which work was to be done, • Technical information indicating that the technique proposed by the contractor would be unsuccessful, and • Other government contracts to be awarded at the site of construction.100

Proof that the information was withheld does not ensure the contractor of an equitable adjustment. The contractor must show that the availability of the information would have affected his or her performance or bid. The New York Supreme Court found that the state had a duty to disclose all available boring tests and subsurface information in the area of a project. The contractor claimed his bid would have been higher had he had access to all available information. However, the court rejected the claim because the contractor had failed to submit satisfactory evidence to establish the specific effect that more complete information might have had on his bid and how the bid would have differed.101

4.6. Duty to Proceed The duty to proceed with work is usually obligatory for contractors and subcontractors.102 The contractor should be extremely cautious and seek legal advice before even considering stopping work for any cause. Perhaps the only situation where the contractor can cease work is a situation in which he or she is unable to obtain clear direction on a course of action. The government is required to provide clarification or direction when the contractor has failed in his or her performance, has requested

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clarification or direction, and has made good-faith efforts to meet the specifications. In our view, any period of performance is tolled by the negotiations which were never concluded due to the failure of (the government) to furnish a decision in the dispute over the modified specifications. We think (contractor) was entitled to withhold performance until the matter was settled. In his termination notice, the contracting officer denied that (contractor) had excusable cause for non-performance based on defective specifications. We do not think it necessary to determine whether the specifications were defective. (Contractor) contended they were defective, and (the government) entered into negotiations to modify them. Until these negotiations were completed and a decision made as to the form of the modified specifications, (contractor) had no duty to proceed with performance.”103

The contractor’s duty to proceed is clearly spelled out in the disputes clause of government contracts: “Pending final decision of a dispute thereunder, the contractor shall proceed diligently with the performance of the contract and in accordance with the contracting officer’s decision” [see FAR 52.233-1 (i)104]. The duty to proceed, set forth in dispute clause, is independent of any disagreements about specification interpretations between the contractor and government.105 “The duty is placed upon the contractor to protect the Government and to ensure that work does not cease while differences between the parties are resolved.”106 Even if the contractor’s interpretation of a dispute is correct and a time extension is imminent, the contractor is still obligated to perform. In American Dredging v. U.S., the board and contracting officer were justified in finding that the contractor “had not and would not, as it was contractually obligated to do, diligently proceed with the work pending resolution of the changed condition dispute.”107

4.7. Duty to Inspect Overinspection and untimely inspection can cause changed conditions or delays. If the engineer or government, as project owner, imposes a higher level of performance than the specifications require, the

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contractor is entitled to an equitable adjustment. Recognize, though, that a contractual right to inspect work for the government does not give rise to a duty to inspect a contractor’s work.108 Furthermore, any right to inspect does not impose upon the government responsibility for deficiencies discovered in the contractor’s work.109 Sometimes, overzealous inspectors require installation and placement tolerances of materials and equipment much tighter than customary. The different material institutes (e.g., American Concrete Institute and American Reinforcing Steel Institute) set tolerances for manufacturing and installation of their products. The crafts usually try to adhere to these tolerances, but some variances beyond the worker’s control are expected and are not harmful. Unless an installation is structurally unsound or the appearance is clearly beyond the reasonable intent of the specifications, additional costs to maintain tighter control or make corrections may be cause for an equitable adjustment. Unlike the government or engineer, a contractor has a duty to inspect the construction work.110

4.7.1. Improper Rejection The owner has a right to set tight specifications so long as they are clear and not impossible. However, where costs are incurred due to rejection of the work for improper interpretation of the specifications by the inspector, an equitable adjustment may be due. In the case of Granite Construction Company, the owner rejected concrete, asserting that it did not meet porosity and durability criteria not mentioned in the specification. The board found “that the concrete in question was improperly rejected on a basis not specified in the contract.”111 In another case, the court found that unreasonable overinspection, ambiguities in specifications, and alterations in an inspection system by the government without consideration of past practices could lead to unreasonable rejections of work.112 The contractors, therefore, were entitled to equitable adjustments for the improper rejections in both cases.

4.7.2. Improper Acceptance If the government is aware that the contractor is deviating from the specifications in an unacceptable manner, it has a duty to inform the contractor. In Hydrospace Electronics & Instrument Corp., “the government was aware that (the contractor) was deviating from the contract

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requirement for stainless steel in a manner that was determined to be patently unacceptable. In our opinion, the government, under these circumstances, had a duty to inform (the contractor) of its erroneous course of action in a timely manner and the (contractor) is entitled to recover for the consequences of the government’s failure to do so.”113 However, this case is an exception, and the wise contractor will not rely on the owner’s inspection program. In the aforementioned example, the government was initially quiet about the improper work. In another case, the engineer specifically authorized improperly changed material and subsequently approved improper application of the materials, relieving the contractor of a suit for unworkman-like installation.114 Untimely inspection, inconsistent inspection, changed inspection systems, and increased paperwork requirements have all been held as constructive changes causing unnecessary interference with the contractor’s work. Test requirements in excess of those required by the specifications, (e.g., increased frequency and different types of tests) are constructive changes, even if such tests show the work to be defective. Untimely inspection that delays the contractor may be considered a delay under the suspension of work clause (if the contract has such a clause). However, the contractor cannot rely on inspection by the owner to absolve himself or herself of any responsibility for defects that better inspection methods might have identified. In a case in which a derrick collapsed because the contractor used undersized bolts, the court rejected the contractor’s contention that the bolts were a patent defect that the government should have discovered under its right to inspect: “Just because the material was subject to inspection and test did not impose upon the government the duty to conduct all-inclusive tests. The right to inspect does not imply a duty to inspect. : : : It did not place any duty on the government to conduct such tests at the risk of assuming responsibility for the deficiencies which it might have discovered.”115

4.8. Conclusion Specification-related issues certainly rank as one of the leading causes of extra costs, delay, and disruption on construction projects. Compiling a complete set of contract drawings and specifications is not a simple task.

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It requires the coordination of several design disciplines, keeping current and familiar with the availability of building materials, keeping up with building technology, fitting a structure into a confined construction site, keeping up with the ever-changing needs of the construction owner, and, finally, meeting established budgets. Errors, omissions, miscues, and misunderstandings are to be expected to some degree, and dealing with these in the fairest way possible is the intent of the established rules of contract interpretation. Owners should spend the money necessary to get the best set of specifications possible. Designers should put in that extra effort to minimize errors and omissions, and contractors should show their interest in improved constructability by notifying owners of ambiguities or foreseeable problems in the contract documents.

Endnotes 1. The Restatements are drafted and published by the American Law Institute (http://www.ali.org); the currently valid Restatement (Second) of Contracts was released in 1981. 2. Corbetta Constr. Co. v. U.S., 461 F. 2d 1330, 198 Ct. Cl. 712, 723 (Ct. Cl. 1972). 3. Blount Brothers Corporation, NASA BCA 865-29, 67-2 BCA ¶6562. See also Appeal of Pool & Canfield, Inc., ASBCA No. 4-3399 (March 4, 1992) (contractor’s interpretation of drawing lines depicting conduit was consistent with industry practice). 4. Corbetta Constr. Co., supra. note 1 at 723. 5. Id. 6. Beacon Constr. Co. v. U.S., 161 Ct. Cl. 1, 314 F.2d 501, 504 (Ct. Cl. 1963). 7. Blake Construction Co., Inc., GSBCA 1345, 65-1 BCA ¶4624. 8. Firestone Tire & Rubber Co. v. U.S., 444 F.2d 547, 195 Ct. Cl. 21, 30 (Ct. Cl. 1971). 9. Id. Accord Turner Constr. Co. v. U.S., 367 F.3d 1319 (Fed. Cir. 2004). 10. Restatement (Second) of Contracts § 202(2) (1981). 11. Unicon Management Corp. v. U.S., 375 F.2d 804, 179 Ct. Cl. 534, 537 (Ct. Cl. 1967). 12. Id. at 538. 13. Franchi Constr. Co. v. U.S., 609 F.2d 984, 221 Ct. C. 796, 803 (Ct. Cl. 1979). 14. Restatement (Second) of Contracts § 203(3)(a) (1981). 15. Restatement (Second) of Contracts, § 203(3)(b) (1981). 16. Hol-Gar Mfg. Corp. v. U.S., 351 F.2d 972, 169 Ct. Cl. 384, 390 (Ct. Cl. 1965). 17. Massachusetts Port Authority v. U.S., 4456 F.2d 782, 197 Ct. Cl. 721, 725 (Ct. Cl. 1972). Accord Oxnard v. U.S., 851 F.2d 344, 34 Cont. Cas. Fed (CCH) P75513 (Fed. Cir. 1988). 18. Id. 19. Id. 20. 169 Ct. Cl. 384, 351 F. 2d 972 (Ct. Cl. 1965). Accord Ponthie v. U.S., 98 Fed. Cl. 339, 343 (Fed. Cl. 2011); see also Gollberg v. Bramson Pub. Co., 685 F. 2d 224

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21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

34. 35. 36. 37. 38. 39.

40. 41. 42.

43. 44. 45. 46. 47.

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(7th Cir. 1982), Silicon Image, Inc. v. Genesis Microchip, Inc., 271 F. Supp. 2d 840, 851 (E.D. Va. 2003); Appeal of Fort Mechanical, Inc., GSBCA No. 6350 (July 18, 1983) (contractor could not simply ignore a drawing scale when interpreting the contract documents); Hills Materials Co. v. Rice, 982 F.2d 514 (Fed. Cir. 1992) (change in OSHA slope requirement compensable because specific reference to specific OSHA regulation ... “issued” superseded the more general terms in the Permits and Responsibilities clause, which placed responsibility with the contractor for compliance with changed regulations). Hol-Gar Mfg. Corp., supra. note 15 at 389. Id. at 390. Id. at 395. Id. at 389. Jarbet Co., ASBCA 14554, 72-1 BCA ¶9379. Appeal of Hull-Hazard, Inc., ASBCA No. 34645 (June 29, 1990). Gholson, Byars and Holmes Construction Co. v. U.S., 173 Ct. Cl. 374, 351 F.2d 987 (Ct. Cl. 1965). Kenneth Reed Constr. Corp. v. U.S., 475 F.2d 583, 587 (Ct. Cl. 1973). Jowett, Inc. v. U.S., 234 F.3d 1365, 1369 (Fed. Cir. 2000). Gholson, Byars and Holmes Constr. Co., supra. note 26 at 396 (citing U.S. v. Standard Crude Oil Purchasing Co., 113 F.2d 194, 200 (10th Cir. 1940)). Id. at 396. 179 Ct. Cl. 651, 376 F.2d 299, 311 (Ct. Cl. 1967). W.G. Connell Co., 179 Ct. Cl. at 670. See also Roy v. Weston Servs. Halliburton National Envtl. Corp., 839 F. Supp. 1144 (E.D. Penn. 1993); Barrow v. Lawrence United Corp., 146 A.D. 2d 15 (NY App. Div. 3d Dep’t 1989). Id. Restatement (Second) of Contracts, §213 (1981). Sylvana Electr. Products, Inc. v. U.S., 458 F.2d 994, 198 Ct. Cl. 106, 127 (Ct. Cl. 1972). Accord Blue Cross & Blue Shield United v. U.S., 117 Fed. Appx. 89, 93 (Fed. Cir. 2004). Id. Restatement (Second) of Contracts, § 206 (1981). See Jefferson Block 24 Oil & Gas, LLC v. Aspen Ins. UK Ltd, 652 F.3d 584 (5th Circ. 2011); HPI/GSA-3C, LLC v. Perry, 364 F.3d 1327 (Fed. Cir. 2004); Ohio Cas. Ins. Co. v. Holeim (US), Inc., 744 F. Supp. 2d 1251, 1260 (S.D. Ala. 2010). Ohio Cas. Ins. Co., supra. note 38 at 1260. Fry Commc’ns, Inc. v. U.S., 22 Ct. Ct. 497, 503 (1991) (quoting Sturm v. U.S., 190 Ct. Cl. 16, 30 (Fed. Cl. 2010)). George Bennett v. U.S., 178 Ct. Cl. 61, 371 F.2d 859 (1967). See also Commonwealth, Dep’t. of Transp. v. Mosites Constr. Co., 90 Pa. Commw. 33, 494 A.2d 41 (Pa. Commw. Ct. 1985) (ambiguous payment schedule construed against the project owner that drafted it). Valley Realty Co. v. U.S., 96 Fed. Cl. 16, 31 (Fed. Cl. 2010). Id. at 40. Ohio Cas. Ins. Co., supra. note 38 at 1261. Olin Mathieson Chem. Corp. v. U.S., 179 Ct. Cl. 368, n. 21 (1967). See Jansen v. U.S., 34 F.2d 363, 170 Ct. Cl. 346, 354 (1965) (court refused to conclude that government intended any other payment formulae than those

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48.

49. 50. 51. 52. 53. 54.

55. 56. 57. 58. 59. 60.

61.

62. 63. 64.

65. 66. 67. 68. 69.

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that appeared on the face of contracts); Granite Constr. Co. v. U.S., 962 F.2d 998, 1003 (Fed. Cir. 1992) (finding appellant’s acquiescence to Army Corps of Engineers’ request to furnish waterstop samples for inspection and testing by government was a cause of conduct that reflected the parties’ understanding that the government’s responsibility to test waterstop was separate from appellant’s obligation under the contract to provide and maintain an effective quality-control system). C. Stanley Dees and Gilbert J. Ginsburg, “Contract Interpretation and Defective Specifications,” Government Contracts Monograph No. 4 (published by the Government Contracts Program, the George Washington University, 1975), 16–17. Maxwell Dynamometer Co. v. U.S., 181 Ct. Cl. 607, 386 F.2d 855 (Ct. Cl. 1967). Maxwell Dynamometer Co., supra. note 48 at 630. Max Drill, Inc. v. U.S., 192 Ct. Cl. 608, 427 F.2d 1233 (1970). U.S. v. Spearin, 248 U.S. 132 (1918). See Beacon Constr. Co., supra note 5 at 504. Bromley Contracting Co., ASBCA 14884, 72-1 BCA ¶9252. See also Appeal of Harrison Western/Franki-Denys, Inc., ENGBCA No. 552-3 (Nov. 22, 1991) (contractor was not required to detect a latent error in a drawing note). Aerodex, Inc. v. U.S., 189 Ct. Cl. 344, 358 (1969). Ralph C. Nash, Government Contract Changes (Federal Publications, Inc., Washington, DC, 1975), 275. Neal & Co. vs. U.S., 19 Cl. Ct. 463 (1990). Restatement of Contracts, § 454. Restatement (Second) of Contracts, § 261. Natus Corp. v. U.S., 178 Ct. Cl. 1, 14 (1967). See also Appeal of Centex Construction Co., Inc., ASBCA No. 29323 (Sept. 30, 1985) (contractor was required to devise construction techniques that would meet a difficult design). Natus Corp., supra. note 59 at 14. See also Short Bros, PLC v. U.S., 65 Fed. Cl. 695, 783 (Fed. Cl. 2005); Williamette Crushing Co. v. State by and Through DOT, 188 Ariz. 79, 81, 932 P.2d 1350, 1352 (Ariz. Ct. App. 1997). LB & B Associates v. U.S., 91 Fed. Cl. 142, 153 (Fed. Cl. 2010). Id. at 153. Id. at 153. See Granite Constr. Co. v. U.S., 962 F.2d 998 (Fed. Cir. 1992) (held government should not have been permitted to direct the replacement of work in a situation where the cost of correction was economically wasteful and the work was otherwise adequate for the intended purpose). Bell/Heery v. U.S. 106 Fed. Cl. 300, 314 (Fed. Cl. 2012) (quoting Int’l Data Products Corp. v. U.S., 492 F.3d 1317, 1325 (Fed. Cir. 2007)). Bell/Heery, supra. note 64 at 313. Saddler v. U.S., 287 F.2d 411, 15 Ct. Cl. 557, 561 (Ct. Cl. 1961). Id.; See also Centex Constr. v. ACSTAR Ins. Co., 448 F. Supp. 2d 697, 716 (E.D. Va. 2006). Cf. Saddler, supra. note 66 at 562–64 (holding that the added work to a contract projected by the government, though it was the same kind of work described in original specifications, more than doubled the amount of earth to be placed and amounted to a cardinal alternation falling outside the scope of the contract) with Gen. Contracting & Constr. Co, Inc. v. U.S., 84 Ct. Cl. 570, 579 (1937) (holding

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70.

71. 72.

73.

74.

75.

76.

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the authority vested in the government’s contracting officer to make changes in drawings and specifications did not vest in him authority to entirely eliminate a building from the construction contract). See also L.K. Comstock & Co., v. Becon Constr. Co., 932 F. Supp. 906 (E.D. Ky. 1992). Helene Curtis Industries, Inc. v. U.S., 160 Ct. Cl. 437 (1963) (finding the government may have a duty to disclose information to the contractor depending on the type and terms of the contract). Accord Robins Maintenance, Inc. v. U.S., 265 F.3d 1254, 1257 (Fed. Cir. 2001). See also Savage v. Peter Kiewit Sons’ Co., 249 Ore. 147, 432 P.2d 519, 523 (Ore. 1967). Helene Curtis Indus., Inc., supra note 69 at 444. Id. See e.g. Snyder-Lynch Motors, Inc. v. U. S., 154 Ct. Cl. 476, 292 F. 2d 907 (1961) (defendant did not disclose that the cost of certain parts required by plaintiff in the contract would substantially exceed an estimate suggested to plaintiff by a government contract negotiator); Bateson-Stolte, Inc. v. U.S., 145 Ct. Cl. 387, 172 F. Supp. 454 (1959) (defendant was under a duty to disclose if it knew that the Atomic Energy Commission was contemplating the construction of a huge construction project in the same general area, which would necessitate the employment of a large labor force from high-wage-rate urban areas and thereby increase the prevailing wages in the area. The case was remanded to the trial commissioner, and it was subsequently held that the defendant did not possess this information); Bateson-Stolte, Inc. v. United States, 158 Ct. Cl. 455, 305 F. 2d 386 (1962); Ragonese v. U.S., 128 Ct. Cl. 156, 120 F. Supp. 768 (1954) (defendant did not disclose information that would have warned plaintiff that it was apt to encounter large quantities of excess underground water in the construction area). See generally Am. Ship Bldg. Co. v. U.S., 228 Ct. Cl. 220, 225 (Ct. Cl. 1981); R.J. Wilder Contracting Co. v. Ohio Turnpike Comm’n, 913 F. Supp. 1031, 1042 (N.D. Ohio 1996) (known as superior knowledge doctrine under Ohio law). Giesler v. U.S., 232 F.3d 864, 877 (Fed. Cir. 2000) (holding the government had no duty to volunteer information to the contractor because it could have readily obtained this information). See also H.N. Bailey & Assoc. v. U.S., 449 F.2d 376, 196 Ct. Cl. 166, 177 (Ct. Cl. 1971) (“the corollary of the Curtis rule is that the Government is under no duty to volunteer information in its files if the contractor can reasonably be expected to seek and obtain the facts elsewhere”); Uhley v. Tapio Construction Co., Inc., 573 So.2d 390 (Fla. 4th DCA 1991), rev. denied, 583 So. 2d 1037 (contractor had an obligation to confirm benchmark elevations in the field). Laburnum Construction Corp. v. U.S., 325 F.2d 451, 163 Ct. Cl. 339, 350 (Ct. Cl. 1963). See also Williamette Crushing Co., supra. note 60 at 82, 1353; W. H. Lyman Constr. Co. v. Gurnee, 84 Ill. App. 3d 28, 37, 403 N.E.2d 1325, 1331 (Il. App. Ct. 2d Dist. 1980); Dewey Jordan, Inc. v. Maryland-Nat’l Cap. Park & Planning Comm’n, 258 Md 490, 497, 265 A.2d 892, 896 (Md. App. Ct. 1970); Appeal of Oneida Construction Co., Inc./David Boland, Inc., Joint Venture, ASBCA No. 44194 (Oct. 6, 1994) (government’s defective specifications hindered the contractor’s progress). Beacon Constr. Co. v. U.S., 161 Ct. Cl. 1, 314 F.2d 501, 504 (Ct. Cl. 1963). See also Appeal of Sherman Construction Corp., VABCA No. 1942 (Dec. 13, 1984) (contractor had a duty to seek clarification of conflicting contract provisions).

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77. Beacon Constr. Co., supra. note 75 at 504 (quoting Ring Constr. Corp. v. U.S., 142 Ct. Cl. 731, 734, 162 F. Supp. 190, 192 (Ct. Cl. 1958)). 78. Beacon Constr. Co., supra. note 75 at 504. 79. WPC Enterprises, Inc. v. U.S., 163 Ct. Cl. 1, 323 F.32d 874 (Ct. Cl. 1963). See also Appeal of Bruce-Anderson Co., Inc., ASBCA No. 29411 (Aug. 1, 1988) (contractor had no duty to discover or seek clarification of a latently restrictive specification). 80. Id. 81. See WPC Enterprises, Inc. supra. note 78 and Metric Constructors, Inc. v. NASA, 169 F.3d 747 (Fed. Cir. 1999). 82. S.O.G. of Arkansas v. U.S., 546 F.2d 367, 212 Ct. Cl. 125, 127-28 (Ct. Cl. 1976). 83. Id. at 128. 84. Id. at 131. 85. Id. 86. Gaston &Associates v. U.S., 27 Fed Cl. 243 (Fed. Cl. 1992). 87. Mt. Home Contractors v. U.S., 192 Ct.Cl.16, 425 F.2d 1264 (Ct. Cl. 1970). 88. Gaston & Associates, supra. note 85 at 247. 89. Blount Bros. Const. Co. v. U.S., 171 Ct. Cl. 478, 496, 346 F.2d 962, 973 (Ct. Cl. 1965). 90. In Mountain Home Contractors, the court noted the cost of the disputed item was less than one-half of 1% of the total contract price, and thus not substantial. 91. Blount Brothers Corporation, NASA BCA 865-29, 67-2 BCA ¶6562. See also Appeal of Pool & Canfield, Inc., ASBCA No. 4-3399 (March 4, 1992) (contractor’s interpretation of drawing lines depicting conduit was consistent with industry practice). 92. Corbetta Constr. Co., supra. note 1 at 723. 93. Gaston & Associates, supra. note 85 at 247. 94. Previously discussed supra. §4-2g. 95. Gaston & Associates, supra. 86 at 247. 96. See Thomas & Marker Constr. v. Wal-Mart Stores, Inc., 2008 U.S. Dist. LEXIS 79072, at *40 (S.D. Ohio 2008) (holding the contractor could not rely upon soil borings report specifically disclaimed by owner in contract documents and wherein the contractor failed to inquire of owner about alternate methods to test/verify soil conditions prior to entering the contract). Cf. Fehlhaber Corp. v. U.S., 138 Ct. Cl. 571, 584, 151 F. Supp. 817 (Cl. Ct. 1957), cert. denied, 355 US 877 (1957) (holding 40-day window for bid provided insufficient time for contractor to bore, sample, and analyze conditions at proposed sites for 32 piers and two abutments, notwithstanding the fact the government disclaimed borings data in its specifications and the exculpatory provisions in the contract didn’t apply to the matter in conflict). 97. See Blount Bros. Const. Co., supra. note 90 at 973. 98. Lewis v. Anchorage Asphalt Paving Co., 535 P. 2d 1188 (Alaska 1975). 99. Helene Curtis Indus., Inc., supra. note 69 at 444. Previously discussed supra. §4-3e. 100. Nash, supra. note 55 at 313. 101. A. S. Wikstrom, Inc. v. State, 52 A.D.2d 658 (N.Y. App. Div. 3d Dept. 1976). 102. Valley View Enterp v. U.S. 35 Fed. Cl. 378, 386 (Fed. Cl. 1996) (“It is the contractor’s contractual duty to proceed with the work sought by the

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108. 109. 110. 111. 112. 113. 114. 115.

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government, even in the face of disagreement”). See also Dave’s Excavation, 90-1 BCA P 22, 311 (ASBCA 1989); D. H. Dave and Gerben Contracting Co., 1962 BCA P. 3493, 17, 838-39 (ASBCA 1962); Metric Sys. Corp. v. McDonnell Douglas Corp., 850 F.Supp. 1568, 1580-86 (N.D. Fla. 1994). Monitor Plastics Co., ASBCA 11 187, 67-2 BCA ¶6408. FAR 52.233. See https://www.acquisition.gov/?q=/browse/far/52. Valley View Enterp., supra. note 101 at 383. Id. Accord Lassiter v. U.S., 60 Fed. Cl. 265, 270 (Fed. Cl. 2004). See American Dredging Co., ENGBCA Nos. 2920 et al. 72-1 BCA ¶9316 and American Dredging Co. v. U.S., 207 Ct. Cl. 1010, 1012 (Ct. Cl. 1977). See also Appeal of Gaudelli Brothers, Inc., GSBCA No. 7123 (March 5, 1984) (default termination was proper where a contractor refused to proceed with the work until an agreement had been reached on the price of a change order). Kaminer Constr. Corp. v. U.S., 484 F. 2d 980, 203 Ct. Cl. 182, 193-94 (Ct. Cl. 1973). Id. at 194. Talley v. Shelly Oil Co., 199 Kan. 767 (Kan. 1967). Granite Construction Co. (ENGBCA No. 3561, 76-1 ¶11,748). Amertex Enters. v. U.S., 1995 U.S. Claims 259, at *203-04 (Fed. Cl. 1995). Hydrospace Electronics & Instrument Corp., ASBCA 17922, 74-2 BCA ¶10682. Bechtold Paving, Inc. v. City of Kenmore, 446 N.W.2d 19 (N.D. 1989). Kammer Construction Co. v. U.S., 203 Ct. Cl. 182 (Ct. Cl. 1973). See also Appeal of Kelley Control Systems, Inc., VABCA No. 2,337 (July 24, 1987) (an interim inspection and approval did not relieve the contractor of the duty to conform to the specifications).

Chapter 5

Construction Project Delays and Time Extensions Thomas D. Fertittaa, Anthony L. Nedinskyb, and Jeffrey G. Gilmorec

5.1. Introduction A construction delay is recognized when a project completes or is forecasted to complete beyond the contract completion milestone or a significant interim contract milestone date specified in the project schedule. A project completion delay usually is caused by an unforeseen event, changes to the scope of work, mismanagement or inefficiencies, or a differing site condition. Project delays usually have a detrimental impact on perceptions of project success and, in some instances, can result in increased costs and other time-related damages to project stakeholders. The following sections discuss the topic of typical delay, explaining various types of delay, when a delay occurs, and how to measure a delay.

5.2. The Critical Path and Float The critical path, or “longest path,” of project activities is the longest chain of interrelated activities beginning at the start of the project a

Principal, TDF, LLC. Project Manager, TDF, LLC. c Chair, Construction Practice, Akerman, LLP. b

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through to project completion. If the chain of activities is a valid consecutive set of interrelated activities, then a delay to an activity along this chain of activities will result in a delay to the project completion date. If an activity is not on the critical path, or the longest path, it generally contains float. Float is a quantity of time, typically measured in days, available to an activity within a network that can be consumed without affecting the latest possible start date of a successor activity and possibly the project’s completion date. Float values are positive when an activity is either on or ahead of schedule and, conversely, float values become negative when activities or the project are behind schedule. Maintaining an accurate project schedule and being aware of the float values of the various activities are extremely important for planning, managing, and performing the work. Activities with float have scheduling flexibility, potentially allowing the contractor to perform these tasks when available resources and access to work areas would be most advantageous. Typically, total float values for activities on the critical path turn negative when the project is behind schedule, reflecting a delay to project completion or a project milestone. Often, when multiple delays occur, many float paths may become negative. Overcoming negative float requires either relief from the current completion date (i.e., a time extension) or a recovery effort that would entail overlapping activity sequences, working overtime, or adding resources.

5.3. Types of Delay When an event occurs that delays a significant contract milestone, the contractor and owner must determine what type of delay has been encountered. Contemporaneous determination is important because delays typically result in additional costs for both the owner and the contractor. This is also an important step in determining the path forward and identifying a potential remedy. Delays are separated into two main categories: excusable and nonexcusable. These terms are classified from the viewpoint of the contractor. When the contractor has a legitimate excuse for delay, the delay is classified as excusable and the contractor is permitted additional time and potentially money to complete the project. When the contractor is solely responsible for delaying the project, the delays are classified as nonexcusable and the contractor may be required to either accelerate

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the pace of work to recover the lost time or potentially be liable to compensate the owner, depending on the contract language, for any additional costs resulting from a late project completion. Excusable delays can further be broken down into compensable and noncompensable delays, which are also classified from the viewpoint of the contractor. These four classifications of delay are discussed in further detail in the following sections.

5.3.1. Excusable Delay Excusable delays are events or impacts that delay project completion dates and result from any issues outside of the contractor’s control. These events may result from an owner-generated issue, such as changes to the construction documents, extensive approval process, differing site condition, and prolonged adverse weather (above and beyond what is considered average), or from an extraneous, uncontrollable, unforeseeable event, which may or may not fall under the contract’s force majeure clause (if it contains one). This is not an exhaustive list, and other issues may arise and result in excusable project delays.

5.3.2. Nonexcusable Delay Nonexcusable delays result from any circumstance that is theoretically within the contractor’s control or could have reasonably been foreseen. This type of delay does not warrant a time extension or additional compensation from the owner. In addition to the extra costs required to fund, staff, and manage the project, the contract may include a liquidated damages clause (usually a predetermined value for each day of delay) that would be deducted from the contractor’s monthly billing or even owed following completion. In addition, depending on the magnitude of the delay, subcontractors may also be damaged. Liquidated damages are discussed in Section 5.15.

5.3.3. Compensable Delay Compensable delays stem from issues outside the contractor’s control that typically result from actions of the owner, a representative of the owner, or a third party within the owner’s control. For the delay to be compensable, the issues that result in delay are typically unforeseen,

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uncontemplated prior to entering into the construction contract, and could not be controlled by the contractor. Project delays usually result in additional costs for the contractor, except when a contractor has not assumed the risk of delay by expressly excluding precipitating conditions from the contract. Examples of delays that result in compensability include change orders or design changes, deficient design drawings, and owner or thirdparty direction that results in work stoppage, to name a few examples. When a delay is determined to be compensable, the contractor is typically due a time extension, which may result in a modification to the original contract duration and/or completion date plus compensation for any resulting additional costs, including additional overhead costs and other time-related costs at the time the delay occurred for a duration equivalent to the compensable delay period. For the owner, providing a contractor with a timely time extension prevents the contractor from initiating a costly acceleration effort and allows the schedule to be maintained according to an accurate completion date. A timely time extension also allows the contractor and owner to address any delay issues that may occur after a compensable delay event without further confusion regarding the project’s completion date. Note that when a contractor pursues compensation for extended overhead for a delay period, the level of overhead utilized during the delay period should be evaluated. Under certain conditions, if the contractor and owner fail to agree on the number of days of delay, a dispute may occur, leaving each party to rely on the contract for remedy.

5.3.4. Noncompensable Delay Noncompensable delays affect the completion of an interim contract milestone or the project completion date but do not entitle the contractor to reimbursement of overhead expenses or other additional costs. These delays are determined to be the fault of either both parties (concurrent delay) or neither party. Noncompensable delays are typically weatherrelated or force majeure events (discussed in Section 5.5). Noncompensable delays can also result from concurrency between two delay events, one of which is compensable while the other is not. Section 5.12 discusses concurrency in further detail. As with compensable delays, timely time extensions avoid the potential for unnecessary acceleration efforts on the contractor’s part and address the project completion date before other delay events occur.

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5.4. When Does a Delay Occur? A construction delay is usually measured by the number of days a significant milestone or contract completion date occurs beyond the forecasted date. A delay event must affect the project’s current critical path or consume any available float of an activity not on the critical path and subsequently the project completion date before it can be considered or acknowledged as a delay.1 An activity can be delayed and still not delay the project because the activity may contain float. In this instance, the activity most likely has a float value greater than that of the critical path, and any delay to this activity can be labeled as consuming float. Note, however, that a delay can still affect a noncritical activity. The resulting impact does not make the activity critical, but can still result in financial damage. An example of this circumstance is when an owner’s prolonged review of a submittal leads to the contractor’s failure to make a key procurement date, and the result is additional material costs due to price escalation. Determining when a delay began can be important in determining whether a delay is compensable or noncompensable due to concurrency. Delays can be discrete and result from events or activities easily determined from the project record. These delays can be reflected in the actual date of the event(s). Nondiscrete delays can also result from broader impacts such as longer-than-planned durations due to unforeseen conditions and/or inefficiencies in completing a task due to weather, site conditions, or any combination of factors. In this instance, the actual days of delay can be intertwined with contract work or could occur periodically throughout the duration of an activity; therefore, pinpointing the exact timing of the impact may require significant research into the project record. Nondiscrete delays may be measured once the planned duration reflected in the approved project schedule is exhausted and validated and begins to adversely affect successor activities.

5.5. Causes of Delay The causes of delay vary from project to project. The following sections categorize typical causes of delay and is not intended to be an exhaustive list.

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5.5.1. Site Access In many projects, the owner controls access to the project site. Site access may be a cause of delay as a result of the owner’s actions or inactions. Some examples of site access delays include owner’s failure to provide information necessary for the contractor to obtain a permit, the previous contractor’s inability to complete its prerequisite work in an area to be used by a successor contractor, security issues that may present a dangerous situation for the contractor or deny the contractor access to a construction site or at least access to areas that are on the schedule’s critical path, or unresolved environmental issues. Often, these types of delay occur in the very early stages of the project or even before a contractor mobilizes. If these types of delay occur at the outset of the project or are early project delays, the approved (or accepted) project schedule, even if initial or preliminary, plays a role in determining the length of and responsibility for delay.

5.5.2. Differing Site Conditions Contractors may experience delays during the construction process if site conditions differ from those anticipated or portrayed in the contract documents.2 These are simply classified as differing site conditions and occur as two types. The first type occurs when site conditions differ from those presented in the contract documents (the plans and specifications). The second type of differing site condition occurs when the existing site conditions differ from those normally encountered in the project area. (It should be noted that specific contract language may alter the definitions of a differing site condition.) The contractor may be delayed due to differing site conditions if the following six criteria are met: • The contract documents described the project’s site conditions. • The actual site conditions differed from those described in the contract documents. • The actual site conditions could not be foreseen at the time of the contract bid. • The contractor was reasonable in interpreting the site condition described in the contract documents. • The contractor relied upon its interpretation of the site conditions described in the contract documents and was reasonable in doing so.

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• The contractor experienced delay or financial damage as a result of the differing site conditions.

5.5.3. Force Majeure Force majeure events are unpreventable, uncontrollable, unpredictable or unforeseeable, and considered to be an external event that affected the project or the contractor’s performance of the contract and delayed completion or an interim milestone. The characteristic of “unforeseeable” is viewed from the time the parties entered into the contract and not immediately prior to an event that may be forecasted with some warning, such as a hurricane. Contract clauses may list acceptable events that constitute a force majeure event. These lists can be limited to “acts of god” which include earthquakes, hurricanes, flooding, etc., but these lists may also include manmade events such as strikes, war, etc.3 Force majeure events are typically considered noncompensable delay under normal circumstances, which allow the contractor to recoup the lost time but not the costs for extended overhead. A potential exception to this statement may exist when a force majeure event occurs within an extended contract performance period that resulted from ownergenerated delay. In this example, the lost time may be considered compensable because of owner-caused controlling delay.

5.5.4. Adverse Weather Many construction activities are weather sensitive. Different phases of construction and types of construction activities have varying levels of weather sensitivity, and the impact of weather events or climates varies greatly between construction activities and construction locations. When extended durations of adverse weather are encountered, the contractor may be eligible to receive a time extension.4 Contractors must prove that the period of adverse weather extended beyond what the contractor reasonably anticipated, affected critical path activity progress, and subsequently resulted in a delay to the project. As with other delays, an activity’s total float must be consumed and critical path activities must be delayed. Extended periods of weather are defined relative to historical averages specific to where the project is located. Construction contracts may address weather and prescribe a procedure to recover time lost due to extended periods of adverse weather. Some contracts require the contractor to include weather days in the

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baseline schedule as nonwork days reflected in the project calendar for weather-sensitive activities. Weather-related delays are typically considered excusable and noncompensable because neither party can control the weather. However, delays may be compensable if weather affects the contractor as a result of owner-caused delays. This issue can also become complicated when owner-caused delays force weather- and temperaturesensitive activities into colder, rainier months. For example, delays that push temperature-sensitive concrete work into the winter may increase the cost of the work. In this instance, a weather-related issue may also become an inefficiency issue.

5.6. Suspension of Work Most construction contracts contain a suspension of work clause that permits the owner or government to suspend all or portions of the work for its convenience. Contractors can pursue compensation for delays resulting from suspension of work provided that they can prove • The critical path activities were delayed, • The suspension of work was unreasonable or went on for an unreasonable amount of time, • The owner or government directed the suspension of work, • The cost of performing the work increased as a result of the suspension, and • The contractor did not contribute to the delay.

5.7. Disruption, Inefficiencies, Loss of Productivity, and Loss of Learning Curve Many activities on a construction project require a large labor component necessary to perform the required steps of an activity. Labor may be disrupted and/or become less efficient as a result of many factors, including mismanagement causing excessive or repetitive sequence and/or location changes; weather effects; inappropriate, inadequate, or under supplies of equipment and materials; acceleration efforts; project conditions; differing site conditions; scope changes; and learning curve for complex activities.

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Many of these examples may require more time to perform the planned work and therefore potentially delay the project. In addition, in some instances a project delay may not occur, yet a subcontractor may spend more hours each workday than planned, and the subcontractor may have to add resources and incur additional costs to perform the planned work to maintain the schedule. Disruption/loss of efficiency is measured in many ways, including a measured mile method and industry labor productivity factors (see Chapters 9 and 10 for further discussion about methods to assess increased costs caused by an inefficient workforce). Knowing when the disrupted period starts and ends is an essential element of the analysis. If a measured mile is used, then the affected period must be separated from the unaffected period so the rate at which units are installed within each period can be compared. Using labor productivity factors to measure labor increases caused by disruption usually requires references within the industry in question. Reference to the contractor’s estimate of the labor to install the materials under anticipated project conditions can then be compared to the actual labor incurred. Typically, these types of delays show up in the project schedule as longer durations than what was planned. Successor activities may be able to start; however, they may be unable to complete, and the performance of the predecessor may affect the efficiency of the successor activity.

5.8. Delays Due to Defective Work Leading to Rework Delays Many contract clauses require a subcontractor to perform work in a workmanlike manner and indicate suitable results in the contract requirements. In most instances, the general contractor is responsible for any deficient work performed by the subcontractor. Contracts typically include language to protect a general contractor and require a subcontractor to remedy the deficient work or allow the general contractor to perform any rework necessary to satisfy the conditions of the contract. If the rework is on the critical path of the schedule, then the subcontractor may be responsible for costs beyond the amount necessary to repair any deficiencies and may include all or parts of a contractor’s liquidated damages.

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5.9. Typical Owner-Caused Delay A typical owner-caused delay occurs when the owner prevents the contractor from performing the work according to an approved/accepted schedule that is usually prepared by the contractor and describes means and methods to accomplish the work. Owner delays typically include issues such as lack of site access, late submittal reviews/approvals, uncertain or continually changing performance requirements, lack of necessary materials and/or equipment needed to complete or test/meet the project’s performance requirements, and lack of timely responses. Other issues may be owner-caused and outside the owner’s control, but may still be an owner responsibility in relation to the general contractor, such as delays created by defective plans or specifications prepared by the owner’s design professionals and certain differing site conditions. Contract language may provide remedies for any known risks.

5.10. Typical Contractor-Caused Delay A typical contractor-caused delay occurs when the contractor exceeds activity durations for critical path activities through no fault of the owner and/or through poor subcontractor performance, slow labor production, inadequate equipment and/or materials needed to perform the work, inaccurate activity durations, or poor schedule practices. Other contractor delays occur when successor activities cannot be performed due to physical constraints that prevent the contractor from continuing its work and that were a known condition at the project’s outset. Some issues may be outside of the contractor’s control and still be considered contractorcaused delay. Examples of this potential situation are late submittal preparation by vendors/subcontractors and late material/equipment fabrication/delivery (assuming no other influences).

5.11. Delays on Multiprime Contracts Multiprime contracts are construction projects that are divided into work by specific trades or phases with the owner or owner’s representative

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contracting directly with each prime trade (contractor) for each division of work. The owner or its representative is responsible for managing the project and coordinating the prime contractors to facilitate construction progress. Typically in a multiprime contract arrangement, no single contractor provides management and/or coordination, and no single contractor is responsible for the overall project schedule; rather it typically falls to the owner or owner’s representative. Each prime contractor is responsible only for performing its trade or phase, and if the actions of a different trade directly affect it, the owner is typically responsible (depending on contract language) for providing the appropriate means for the prime contractors to coordinate their work. The owner is responsible for the priorities and criticality of the overall sequence of work. Even though each prime may have its own “critical path” for its own work, it may differ significantly from the project’s critical path. Therefore, adequate scheduling conventions, procedures, and practices are an important part of the overall project coordination. In some instances, scheduling duties are delegated to a prime contractor or to a third-party consultant; however, the burden of managing the schedule has typically been found to remain with the owner.

5.12. Concurrent Delay Concurrent delay, or concurrency, is defined as a delay event that occurs in an overlapping fashion or concurrently with another delay event. Specifically, each party of the contractual agreement (owner and contractor) causes a delay either of which alone would have delayed the project’s critical path, and the resulting delay is intertwined and difficult to apportion.5 In general, when the contracted parties’ delays overlap, the period of time (or the amount of time of the overlap period) when both delays occur is considered to be a concurrent delay. Concurrent delay occurs in three situations. First is the situation in which two separate overlapping events, one caused by an owner and one caused by a contractor, delay one or more activities on the project’s critical path(s) during the overlapping period of time. As an example, the overlapping delays originate from two different float paths (both critical) converging to delay an activity on a common float path. In this example, an excusable, compensable delay and a nonexcusable, noncompensable delay offset each other. A second situation occurs when the owner and

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the contractor affect a chain of activities and the number of days cannot be apportioned due to the significant overlap of the role each party played during the delay event(s). A third situation occurs when the owner or contractor delays the project and a weather event or force majeure event also delays construction progress. In this instance, an excusable, potentially compensable (owner-caused) or nonexcusable (contractor-caused) delay is offset by the amount of an excusable, noncompensable delay. Utley-James, Inc.,6 states that a contractor would not be eligible to receive compensation for a delay period if a concurrent delay existed: A delay for which the Government is responsible is excusable by definition, and it may also be compensable. The rule is that for a delay to be compensable under either the Changes Clause or the Suspension of Work Clause, it must result solely from the Government’s action : : : . If a period of delay can be attributed simultaneously to the actions of both the Government and the contractor, there are said to be concurrent delays, and the result is excusable but not a compensable delay : : : .7

The inability for delay to be apportioned is the key component of concurrent delay.8 When a single construction activity has several predecessors and at least two of the predecessors are delayed in a scenario similar to one of the three previously discussed, then labeling the concurrency is a much more straightforward exercise. When one looks forensically at a project and two or more separate activities are delayed, both on the critical path but separate in the sequence, then concurrency is not necessarily straightforward. For example, if an owner change is delaying foundations but the contractor is late procuring a necessary reinforcing steel, determining concurrency, or at least determining the start of concurrency in this situation, can be complicated. One aspect to consider is the accuracy of the projection made for the procurement activities that may need to be adjusted once the actual dates are known. The contract sometimes define concurrency by specifically stating that any concurrent delay events need to be part of the critical path(s). Where it is not defined, delay with greater float values may be considered concurrent against float with lesser relative values; however, the impact to the critical path will emerge once the float values of each path have been consumed. Three types of concurrency related to this topic include gross concurrency, literal concurrency, and functional

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concurrency. Gross concurrency means that two or more delay events occurred concurrently and no regard is given to CPM (critical path method) principles. Literal concurrency means that two or more delay events began simultaneously (the same day) and/or occur at the same time. Functional concurrency means that delay events could potentially become concurrent provided the float in the associated paths has been consumed and, until the float is eliminated, may become critical through float path analysis. Essentially, concurrent delays occur on separate paths but both would affect the completion date.

5.13. Pacing Delays When extensive delays are forecasted in the contemporaneous schedule due to a known change, potential change order, or other owner-caused action, schedule activities that were once on the project’s critical path may now gain float as a result of the anticipated delays becoming the new critical path of the project. The contractor may elect to perform the work associated with the former critical path, which has now gained float as a result of the forecasted delay, at a slower rate to reduce costs and preserve its workforce. However, the contractor should take precautions prior to pacing its work by documenting and justifying any planned change to clearly communicate its intentions to the owner. When compensable delay exists as a result of the forecasted delay and when the contractor has chosen to pace its formerly critical work over the extended project duration resulting from the newly forecasted delay that has become the project’s critical path, proper documentation may help the contractor avoid the potential for an owner’s concurrent delay argument. It should be noted that the “pacing” analysis may become more complicated the longer an owner takes to decide on the amount of compensable time a contractor may be due as a result of a change order.

5.14. Delay Documentation, Measurement, and Proof The project record can play a crucial role in documenting and proving project delay. The following sections discuss an important tool for measuring project performance, the project schedule, and the means of

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memorializing the events and issues that occurred on a project, i.e., the project record.

5.14.1. Contemporaneous and Baseline Schedules The baseline schedule represents a contractor’s plan for constructing a project and is a road map to complete the work successfully. A schedule should include input from the superintendents, major subcontractors, and any material suppliers that are furnishing critical/near-critical path equipment or materials. The schedule should be accurate, reflect the contractor’s work plan, and be feasible. The contractor should submit the baseline schedule to the owner in a timely fashion so it can be utilized to manage the project from the earliest date possible. Schedule submissions should conform to the project specifications, which typically outline the minimum standard requirements for the project’s schedule. Examples of schedule requirements outlined in the specifications include references to accepted schedule practices and the detail of the schedule, such as minimum number of activities, coding, structure of schedule, work breakdown structure, resource loading, and cost loading. Once the owner receives and accepts (or approves) the baseline schedule, the contractor should contemporaneously create periodic updates of the schedule to reflect as-built start and finish dates for the schedule activities and a percent complete/remaining duration for activities in progress to provide a current project status. Contemporaneous periodic updates are important in monitoring work progress and determining criticality of activities. As the project progresses, the critical path may change based on the actual progress, forecasted progress, and activity sequences. Typical parameters that affect the critical path are activity progress, material availability, labor effectiveness, and equipment efficiency. As noted, the critical path may also depend on the sequence of construction activities and the means and methods as determined by the contractor performing the work. In addition, the as-planned schedule almost always differs from the as-built schedule because as the project moves forward, contingencies arise that delay some activities and accelerate others, further affecting the critical path and the forecasted chain of activities to be performed. What was considered to be critical in the planning stages may not be critical during the actual performance of the project.9 Thus, as the Fortec court noted, “if the CPM is to be used to evaluate delay on the project, it must be kept current and must reflect delays as they occur.”10

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Usually an owner’s scheduling specification requires a contractor to provide periodic (usually monthly and sometimes bimonthly) schedule updates that allow an owner to understand the critical activities and the ebbs and flows of the project. The owner has three options when reviewing the periodic schedule updates: accept, reject, or simply status as reviewed. Owners sometimes place caveats on accepted monthly schedule updates stating that their acceptance does not necessarily mean that they agree with the contractor’s updates or with the schedule’s accuracy. An owner may choose to reject a schedule if the contractor added activities or included logic changes outside of the specifications, or if the owner believes the status, as presented by the contractor, is inaccurate and/or does not agree with the critical path(s) shown in the project schedule outside of any means and methods interpretations. When schedules are cost loaded, the owner may choose to designate the schedule update as “reviewed,” which will simply verify updated status and allow the owner to voice any potential disapproval of the schedule without holding funds due to the contractor. The insistence (by both the contractor and the owner) upon a sound and accurate schedule is significant to the success of a project.

5.14.2. The Project Record Delays are measured based on their impact to the project’s completion date or other significant milestone. The effect on that milestone begins as an impact on one activity or a series of activities. To apportion responsibility for each delay, understanding all the components that contributed to the delay is essential. An accurate baseline schedule, contemporaneous schedule updates, and thorough and accurate record keeping are vital for apportioning delay and validating a delay claim.11 Establishing and maintaining an accurate and detailed project record is necessary and may play a significant role in establishing and defending a position.12 The following are the primary documents that should be maintained during the life of the project: • Baseline schedule; • Contemporaneous schedule updates, which are updated periodically and regularly during the life of the project; • Contractor and subcontractor daily reports; • Letters or e-mails documenting any delays or issues; • Logs tracking all documents, including

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RFIs (Requests for Information), Submittals/transmittals, Letters, Shop drawings/coordination drawings, and Contract changes and/or potential contract changes; and • Meeting minutes from any meeting with the owner or subcontractors. ○ ○ ○ ○ ○

Documenting the daily work is important in determining the impacts that result in project delay. The contractor and owner should maintain daily reports that accurately detail the daily work tasks and events. Daily reports should be maintained for every workday and include, at a minimum, the following information: • An accurate and detailed description of the work performed, including locations by trade; • Number of employees working for the contractor and/or each subcontractor; • Significant material deliveries; • Any issues/delays/events that prevent the planned work from occurring—even if this entry is repeated until the planned work can occur; • Change order work performed (if possible to discretely identify); and • Weather conditions.

When a delay is claimed, the event that triggered the project delay and its relationship to the project’s critical and near-critical paths should be carefully evaluated and should be identifiable in the project record. All contemporaneous documents should be examined to illustrate a thorough chronology of the event and the project status at the time when the delay event began.13

5.15. Liquidated Damages Liquidated damages represent an owner’s estimated additional cost resulting from the contractor’s failure to complete the construction project on time. They are typically detailed in the construction contract,

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provided as a rate (e.g., dollars per day), and applied when the contractor’s performance period extends beyond the contract completion date. The effective date and the amount or schedule of liquidated damages may represent the owner’s damages associated with the extended duration of the project, including a calculation of lost revenue, time-related project-administration costs, and additional financing costs. Liquidated damages are assessed when the contractor is responsible for a nonexcusable delay that prevents achievement of a properly adjusted completion date defined by the contract documents. In some instances, the contract may stipulate that the amount of liquidated damages be reduced or prorated if some portions or phases of the construction project are available for the intended use or the owner has partially accepted the facilities. The contract may further provide different liquidated-damage rates to be assessed for delays to interim milestones, substantial completion, or final completion. Owners may use the liquidated damages clauses where actual damages resulting from a project delay are difficult or impossible to calculate. When calculating the rate for liquidated damages, the owner is required to make a reasonable estimate of the damages.14 The rate of liquidated damages stipulated by a contract may be deemed excessive and, as a result, be unenforceable.15

5.16. No Damages for Delay Clause Some construction contracts between an owner and general contractor may contain a no damages for delay clause. The general contractor may include this clause in the contract between the general contractor and its subcontractors. The no damages for delay clause states that a general contractor cannot pursue additional compensation for various delays, including delays caused by the owner and/or the owner’s representatives. The additional compensation exclusions specified by this clause include costs such as extended overhead that is over and above the direct costs resulting from an owner- or owner’s representative-generated change. Many courts have recognized exceptions to the enforcement of these provisions. In circumstances involving deliberate, intentional, or wrongful conduct by the party seeking to avoid liability, a no damages for delay clause may be deemed unenforceable. 16

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5.17. Remedies for Project Delay When the completion date of a project is delayed, several potential remedies are available for the contractor and the owner. The type of delay typically dictates the remedy used. If the contractor is responsible for a nonexcusable delay, it typically has two courses of action: (1) the contractor may choose to complete the project at the current pace and as planned and, if stipulated by the contract, potentially be required to reimburse the owner for liquidated damages, or (2) the contractor may choose to accelerate the schedule or mitigate the delays in an attempt to recover lost time because an extended contract duration could mean additional indirect and overhead costs in addition to the potential for liquidated damages. If an excusable delay occurs that is either compensable or noncompensable, the owner may grant a time extension. Time extensions granted on delays that are both excusable and compensable typically allow the contractor to pursue reimbursement for additional overhead costs that resulted from an extended project duration. Such extensions should be granted as near as possible to the conclusion of the event to provide the contractor with an understanding of the contract completion date. Without timely time extensions, the schedule may calculate a negative float condition, which may trigger automatic contractual consequences or cause the contractor to accelerate its work needlessly. Time extensions granted on noncompensable excusable delays do not allow the contractor to pursue reimbursement for additional overhead costs from the owner. If the project was delayed due to an excusable delay, the owner may also direct the contractor to accelerate its work in an attempt to recover lost time or maintain project milestones. In this instance, the contractor is due compensation for the additional effort required to accelerate the pace of construction.17

5.18. Conclusion Complex construction projects require the project team of all stakeholders to possess a broad range of project-management skills to guide the project to a successful completion. Over time, the project schedule has become increasingly important as a management tool. A thorough

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and achievable baseline schedule developed through sound industry practices and updated through industry standards increases the chances of a successful outcome. In the unfortunate circumstance where a project falls behind schedule, stakeholders turn to the project schedule and the project record to determine potential risk, damages, and recovery of a project that is forecasted to complete later than planned. Contemporaneous understanding of the project conditions that constitute a delay—along with the various types of delays, including the causes of concurrent delay—may provide the stakeholders with a path forward to complete the project. An in-depth project record and accurate schedule often provide both the necessary foundation for measuring project delays and significant information for proving or refuting a delay or resequencing activities to return the project to an on-time condition.18

Endnotes 1. To prevail on a delay claim, the claimant must show the extent of the delay, the causal link between the actions or inactions contributing to the delay, and the harm resulting from the delay. See Essex Electro Engineers, Inc. v. Danzig, 224 F.3d 1283, 1295 (Fed. Cir. 2000); Wilner v. United States, 24 F.3d 1397, 1399 n.5, 140001 (Fed. Cir. 1994) (en banc); Kelso v. Kirk Brothers Mechanical Contractors, Inc., 16 F.3d 1173, 1177 (Fed. Cir. 1994). 2. See Metcalf Construction. Co., Inc. v. United States, 742 F.3d 984 (Fed. Cir. 2014) (“for preliminary information only” disclaimer in contract documents concerning subsurface condition reports for U.S. Navy housing facility did not preclude right of contractor to rely on reports). 3. See United States v. Brooks-Callaway Co., 318 U.S. 120 (1943). 4. See, e.g., Norair Eng’g Corp. v. United States, 666 F.2d 546, 547 (Ct. Cl. 1981). 5. See George Sollitt v. United States, 64 Fed. Cl. 229, 238 (2005); Klingensmith, Inc. v. United States, 731 F.2d 805 (Fed. Cir., 1984); Blinderman Constr. Co. v. United States, 695 F.2d 552, 559 ( Fed. Cir. 1982). 6. GSBA No. 5370, 85-1 BCA ¶ 17,816 (1984), aff’d Utley-James, Inc. v. United States, 14 Cl. 7. Utley-James, Inc., GSBCA No. 5370, 85-1 BCA ¶ 17,816, at 89,109 (1984) (citations omitted). 8. See, e.g., Blinderman Constr. Co. v. United States, 695 F.2d 552, 559 (Fed. Cir. 1982); William F. Klingensmith, Inc. v. United States, 731 F.2d 805, 809 (Fed. Cir. 1984); Wunderlich Contracting Co. v. United States, 351 F.2d 956, 969 (Ct. Cl. 1965); Commerce Int’l Co. v. United States, 338 F.2d 81, 90 (Ct. Cl. 1964). 9. See SAE/Americon-Mid Atlantic, Inc., GSBCA Nos. 12,294 et al., 98-2 BCA ¶ 30,084 (board accepted a time impact analysis using a reasonable adjusted

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12.

13.

14. 15.

16.

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as-planned schedule as the initial baseline, analyzed the schedule before and after each delay, evaluated the interrelationships of the delays, and adjusted the as-planned schedule for the actual status of the project and the remaining work to evaluate each successive delay). See Fortec Constructors, Inc. v. United States, 8 C1. Ct. 490, 506 (1985). A credible CPM time impact analysis should take into account and give appropriate credit for all impacts to the project. See Gulf Contracting, Inc., ASBCA Nos. 30195 et al., 89-2 BCA P 21,812 at 109,759, [*98] aff’d on recons., 90-1 BCA P 22,393, aff’d, 23 Cl. Ct. 525 (1991), aff’d, 972 F.2d 1353 (Fed. Cir. 1992) (table), cert. denied, 506 U.S. 999 (1992). See, e.g., Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010), ([contractor’s expert] “purported to compare [contractor’s] as-built performance against [contractor’s] as-planned . . . schedule, his analysis is in essence a ‘total time’ approach, which is of virtually no value. [Contractor’s expert] simply takes the original and extended completion dates, computes therefrom the intervening time or overrun, points to a host of individual delay incidents for which defendant was allegedly responsible and which ‘contributed’ to the overall extended time, and then leaps to the conclusion that the entire overrun time was attributable to defendant.” [citation omitted]. It is well settled that this “total time” theory of proving delay is insufficient to meet the contractor’s burden to prove that government-caused delay actually delayed the overall completion of the project). See, e.g., Blinderman Constr. Co. Inc. v. U.S., 39 Fed. Cl. 529, 585 (1997), aff’d, 178 F.3d 1307 (Fed. Cir. 1998) (delays must be evaluated by comparing updated CPM schedules prepared immediately before and after each purported delay; afterthe-fact analysis, which was not contemporaneous with the alleged delay, found insufficient). See Restatement (Second) of Contracts § 356. Brooks v. Bankson, 248 Va. 197, 208, 445 S.E.2d 473, 479 (1994) (liquidated damages provision may constitute a penalty and therefore be unenforceable when the amount agreed to is “out of all proportion to the probable loss”). See Zachry Construction Corporation v. Port of Houston Auth., 2014 Tex. LEXIS 768, 57 Tex. Sup. J. 1378 (Aug. 29, 2014) (Supreme Court of Texas held clause unenforceable because of Port’s intentional interference and other actions affecting the contractor’s performance). Fraser Construction Co. v. United States, 384 F.3d 1354, 1361 (Fed. Cir. 2004) (compensable acceleration requires, among other things, a government direction to the contractor to complete the work before the contract completion date, including any extensions to which the contractor is entitled, and the expenditure of extra resources by the contractor to meet the government requirement). See Lovering-Johnson, Inc., ASBCA No. 53902, 05-2 BCA ¶ 33,126, (“[contractor] wholly failed to comply with its contractual responsibilities to timely provide performance schedules. No arguably adequate [schedule] was submitted for the first year of performance well after [contractor] had commenced construction, with or without limited notices to proceed from the Navy. The government had a contractual right to base any time extension on [schedule] submissions. Progress payments were also to be based on updated schedules. [Contractor’s] failure to

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provide schedules deprived both parties of a valuable contract administration tool that was designed, inter alia, to contemporaneously identify and provide notice of the impact of the claim events on completion of the construction phases. The contemporaneous absence of the required scheduling materials rendered the [schedule] tool useless during much of the period involved in this dispute and subject to after-the-fact manipulation and rationalization. It also frustrated analysis and resolution of [contractor’s] REA”).

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Chapter 6

Acceleration and Mitigation of Project Delays Christopher M. Burkea and Michael J. Harrisb

6.1. Introduction Mitigation involves accommodations by the contractor to reduce or minimize the potential cost or delay of an owner change. Acceleration is a process the contractor implements to speed up progress on a job to make up for lost time or to achieve an earlier completion than would have otherwise occurred under the current plan. Acceleration is closely associated with delay because contractors often accelerate their work to make up for time lost to prior delays. This chapter discusses various types of acceleration, the difference between acceleration and mitigation, and the attendant conditions that can determine the success or failure of contractor acceleration claims.

6.2. Mitigation An aggrieved party is generally not allowed to recover damages that it could have reasonably avoided. A contractor is therefore obligated to mitigate damages arising from causes for which it is not responsible, such as differing site conditions or owner changes. If this is not done, the a

Partner, Varela, Lee, Metz & Guarino, LLP. Vice President, Warner Construction Consultants, Inc.

b

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contractor may not be able to recover all of its damages resulting from the change. Similarly, the contractor is obligated to mitigate delays associated with owner changes. The duty to mitigate delay requires that a contractor revise its schedule to reduce the potential time impact of an owner delay so as long as the schedule changes have no meaningful effect on the contractor’s schedule plan or costs. The primary difference between mitigation and acceleration is that the duty to mitigate does not require the contractor to spend its own money to reduce the delay. While some may argue that any schedule change has an associated cost, some schedule changes may not create any noteworthy contractor expense. If the construction sequence can be changed so that work in the area affected by a delay is switched to come after similar work in a different and unaffected area, then the potential delay may well be mitigated at no meaningful cost. Shortening the duration of a critical activity by adding a crew is a mitigation tactic that might be implemented at a negligible cost as long as the added crew can work as efficiently as the existing crews and the efficiency of the existing crews is likewise not compromised.

6.2.1. Duty to Mitigate While the duty to mitigate does not require the contractor to pay for steps it takes to lessen the cost or time impact of a change, mitigation often does come at a cost. In these cases, the contractor should notify the owner of the intended mitigation measures to provide the owner with the option to proceed, or not, with the contractor’s proposal. Failure to provide such notice may preclude the contractor’s recovery of the additional costs. For example, contract clauses often provide for a time extension for delays caused by abnormally adverse weather. If, however, the owner has a deadline that practically precludes it from granting any additional time, then the owner may need to minimize delays caused by inclement weather. By way of example, to mitigate potential delay from an expected rainfall, the site-work contractor may consider sealing key areas of the site with lime. If the contractor fails to first obtain the owner’s approval for the additional expense, it may end up paying for the cost of that treatment. Owners generally have the right to know when a contractor is incurring costs for which it intends to hold the owner responsible, even if the contractor is mitigating an owner delay. In addition to the

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concept that a contractor “volunteers” when performing work not authorized by the owner, contracts often have specific requirements to notify the owner of any work that the contractor considers to be additional scope. Many contracts require the contractor to submit a time impact analysis consisting of a comparison between the “unimpacted” schedule update just prior to occurrence of the change and the “impacted” schedule that includes a fragnet representing the added work or changed conditions. The duty to mitigate delay also comes into play here, requiring the contractor not to overstate the true effect of the change. The fragnet should be sufficiently detailed so as to represent the actual work of the change and should be tied into the schedule so that it does not unnecessarily impact items that the change does not truly affect. This may require parsing existing schedule activities into more detail and/or resequencing work. On projects with anything more than a minor daily general conditions rate, the cost of even a one-day time extension may well exceed the cost of any potential disruption of the added resources that would be needed to incorporate the change without affecting the project’s completion date. If a cost is associated with mitigation of the delay or multiple viable options are available for cost/time tradeoffs, then these should be submitted with the contractor’s cost proposal for the change. The duty to mitigate requires the contractor to reduce its costs when it can be reasonably done to avoid unnecessarily running up the owner’s tab during a delay and to incorporate realistic changes into the schedule to preclude superfluous delay. Although the contractor may not be obligated to inform the owner of all additional options that might be available to reduce the overall cost of delay, suggesting alternatives may lead to owner concurrence, direction, and approval, each of which can make the contractor’s recovery of its costs more certain.

6.2.2. Owner’s Mitigation Obligations The previous discussion primarily covers the contractor’s mitigation of owner delays. While specific contract clauses and jurisdictional differences may affect the contractor’s and owner’s obligations, the owner also has an obligation to the contractor to mitigate its potential damages. Liquidated damages clauses typically cover the owner’s costs of contractor delay. In situations where the contractor is attempting to recover

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from its own delays, it may not be practical for an owner to mitigate by reducing its time-related costs, but an owner’s mitigation can include such measures as cooperating with the contractor to expedite return of submittals and responses to requests for information. The line between mitigation and acceleration may seem to blur in the previous discussion, where mitigation of delay involves spending a somewhat small amount of extra money to save a larger sum, but the bright-line distinction has historically been that the duty to mitigate does not require a party to undertake measures that will force it to incur additional cost. Acceleration, in contrast, will result in additional costs, and the party causing the need to accelerate will bear these costs. This may be the contractor, owner, or perhaps both parties if each has caused or contributed to the delay.

6.3. Acceleration A contractor can accelerate (1) voluntarily, (2) constructively, or (3) pursuant to a directive by the owner: 1. Under voluntary acceleration, the contractor, at its own initiative, makes efforts to overcome its own delays and/or to complete activities earlier than planned. 2. Directed, or ordered, acceleration occurs when the owner explicitly instructs the contractor to accelerate the work. 3. Constructive acceleration occurs when the contractor is forced to attempt to achieve a completion date that is earlier than what should be required under the contract because the owner did not grant an extension for excusable delay in a timely manner. Constructive acceleration arises when the owner causes the contractor to accelerate not by an express direction but implicitly through the owner’s actions. When the contractor makes a reasonable attempt to accelerate and incurs additional expenses in cases of directed or constructive acceleration, full recovery of the lost time is not required for the contractor to recover its costs (although recovery of any costs is predicated on the existence of an excusable delay and the measure of recovery is tied to the extent of the excusable delay).

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6.3.1. Constructive Acceleration Requirements Constructive acceleration commonly occurs where an owner requires a contractor (or a contractor requires a subcontractor) to meet the original delivery schedule or a schedule not properly adjusted for prior excusable delays in spite of such excusable delay. Five requirements support a finding of contractor recovery in a constructive acceleration setting: 1. A period of excusable delay, 2. Knowledge by the owner of the delay coupled with an opportunity to address the delay, 3. Failure of the owner to grant or deny a time extension on account of the delay within a reasonable time, 4. An order from the owner demanding a level of effort be expended to complete the project without such time extension, and 5. Incurrence of additional costs as a result of the contractor’s acceleration.1 Constructive acceleration can arise when excusable delay occurs that entitles the contractor to a time extension and where the owner has knowledge of that potential time extension (contractors are cautioned to study their contract terms concerning notification of delay events). If the owner then fails to grant the time extension, or unreasonably delays granting of the time extension, and then also requires completion by a date earlier than what would have been allowed considering the excusable delay, a contractor may be entitled to acceleration costs that it incurs upon performance of acceleration measures to complete on time. Express Directive Not Required For a contractor to make a claim for constructive acceleration, the owner need not expressly direct the contractor to accelerate. Constructive acceleration occurs when the owner’s actions require completion of the work in accordance with schedules not updated to include all time extensions for excusable delays. In Norair Engineering Corporation v. United States, the government requested that the contractor “take proactive action to expedite the work

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by supplying the job with all materials necessary to accelerate progress.” The government did not inform the contractor until the end of the job whether encountered delays were excusable, and the government threatened liquidated damages against the contractor during performance. In determining the contractor’s entitlement to a claim for acceleration costs, the Norair court stated The pressure applied, even if it was merely implicit (which it was not), is particularly strong where liquidated damages hover in the background. Where the Government refuses (for whatever reason) to tell the contractor until the end of the project just what delay is excusable and what is not, the contractor is under considerable additional pressure to accede to a request because it does not know whether it will be found liable for liquidated damages.2

The Norair board also made reference to “the clear law that an acceleration order need not be couched in explicitly mandatory terms.” Importantly, however, an owner’s mere inquiry concerning acceleration cannot be treated as a request to accelerate. In Appeal of A. Teichert & Son., Inc., the Armed Services Board of Contract Appeals held that an owner’s request that a contractor submit a plan for regaining lost time or avoiding further loss of time would not be considered an order by the contracting officer or his representative to accelerate the work.3 Notice, Request for Time Extension Because an owner may not always know of a delay, contractors should notify the owner not only of all delays, but of any action on the owner’s part that the contractor considers an acceleration order, implicit or otherwise. In so doing, an owner will be warned of the extra costs and have a chance to take alternative action. Such notice also documents that the contractor is not doing the accelerated work voluntarily. Surrounding circumstances, however, can occasionally transform a request to a directive. In a case where the resident engineer requested the prime contractor to speed up its work, the government claimed that the contractor voluntarily complied because it was in the mutual interest of both parties not to extend the work into winter. In deciding one contractor’s appeal, the Armed Services Board of Contract Appeals stated

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We are unable to see any difference between a request and an order under the circumstances. The initiative came from the Government for the Government’s convenience. It makes no difference whether [the contractor] complied willingly or unwillingly, or whether or not it also benefited from the compliance. This work was done in a manner different from that required by the contract. [The contractor] is entitled to reimbursement for it.4

Explicit Denial of Time Extension Not Required As set out previously, the clear-cut case of constructive acceleration exists where the contractor requests a time extension that is refused by the owner, who requests the contractor to adhere to the original schedule. Failure of a contractor to request time extensions and/or failure of the owner to deny the requested time extensions will not necessarily defeat a claim for constructive acceleration. In an appeal filed by Electronic and Missile Facilities, Inc. with the Armed Services Board of Contract Appeals, the board recognized entitlement to a contractor’s acceleration claim. The board’s focus was not on the precise nature of the “time extensions” submitted (indeed, the record reflected that the contractor did not precisely submit time-extension requests consistent with the contract requirements), but rather on the owner’s actions, which consistently impelled the contractor to accelerate the work despite unusually severe weather conditions that were apparent to all parties.5 Similarly, the Armed Services Board of Contract Appeals held in the appeal of Sylvania Electric Products, Inc. that the contractor “should not be barred from : : : adjustment : : : merely because of the absence, technically, of an outright request and refusal for prime contract time extension.”6 Notably, a constructive-acceleration claim can be sustained where an original request for a time extension was rejected but was subsequently granted after the contractor’s intervening acceleration effort.7 An untimely grant of a time extension can have the same effect as not having granted a time extension at all. An owner, however, must have a reasonable opportunity to deny or grant a time extension.8 Contract terms requiring timing and necessary support for time extensions will also impact a determination of whether an owner was sufficiently informed so as to assess a time extension request.

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6.4. Proving Delays, Time Extensions, and Acceleration Schedule analysis is the method of choice in proving delays and requesting time extensions and is routinely recognized by boards and courts. Schedules should be accurate, complete, and regularly updated. In government contracts, ongoing schedule analysis is used to measure contractor performance and to determine when a time extension is justified. Government determination that the contractor has fallen behind schedule can trigger a direction to accelerate. The “Schedules for Construction Contracts” clause in the Federal Acquisition Regulation states If the Contractor falls behind the approved schedule, the Contractor shall take steps necessary to improve its progress, including those that may be required by the Contracting Officer, without additional cost to the Government. In this circumstance, the Contracting Officer may require the Contractor to increase the number of shifts, overtime operation, days of work, and/or the amount of construction plant, and to submit for approval any supplementary schedule or schedules in chart form as the Contracting Officer deems necessary to demonstrate how the approved rate of progress will be regained.9

Owners do not generally direct acceleration unless a delay has occurred, but often the underlying cause of delay and therefore responsibility for the need to accelerate are in dispute. Chapter 8 discusses detailed methodologies for schedule analysis; however, generally, if the need for acceleration is in dispute, the contractor should take steps to preserve its rights to a time extension and the associated costs of owner-directed or constructive acceleration. The contractor is generally responsible for providing the owner with timely notice of delay to prove the amount of excusable delay and to formally request a time extension. As set out above, the existence and duration of an excusable time extension are necessary elements in order for a court to make a recovery determination on behalf of a contractor.

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6.5. Recovery Schedules and Schedule Acceleration Often, the action that initiates acceleration is an owner’s request for a recovery schedule. A recovery schedule represents the revised plan to complete the project so as to fully or partially recover the time lost to prior delay. An owner’s right to request a recovery schedule, the specific circumstances that trigger the right, and the parties’ respective responsibilities in developing the recovery schedule may be detailed in the contract documents. Alternatively, the right may be implied from more standard contract clauses, such as those that state “time is of the essence,” provide for owner actions if the contractor does not maintain the schedule, or allow the owner to terminate the contractor for default. In light of an owner’s right to terminate a contractor for default, an owner’s request for a recovery schedule should not be taken lightly. Ignoring the request, or complying with the request by blindly revising the schedule to reflect an accelerated completion date, is not a contractor’s most prudent options. While a request for a recovery schedule is not necessarily a direction to accelerate, it typically originates from an owner’s opinion that the contractor is responsible for the project being behind schedule. Best practices, and many contracts, require that a contractor inform the owner in a timely manner about project delays for which the contractor believes it is not responsible and to support the time-extension request with a reasoned and supported schedule analysis. If such a claim has been properly submitted and a disagreement with the owner still exists, then the contractor should take steps to preserve its rights. Upon receipt of a request for a recovery schedule, the contractor should ask the owner to clarify in writing the reasons why the owner believes a recovery schedule is necessary, how much time the owner desires to be recovered, and which party the owner expects to pay for any acceleration effort necessary to achieve the recovery schedule dates. If the contractor disagrees with the owner’s evaluation, it should respond in writing stating its position, noting that it will develop a recovery schedule to comply with the owner’s request but that it is reserving its rights for any associated acceleration costs that may be incurred. Assuming that scope cannot be deleted, expediting, accelerating, or crashing a schedule can be accomplished only by executing critical activities in a more-concurrent-than-sequential manner or by reducing the duration of critical activities. Critical activities are those schedule

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activities that determine how long completing the project will take. Any delay in a critical activity will, unless some other compensatory action is taken, delay the substantial completion date of a project. Shortening critical activities, or the string of critical activities that make up the critical path, will shorten the duration of the project. As the project duration is shortened, however, additional activities may become critical. While revising schedule logic or shortening activities in the scheduling program may be somewhat simple, each of these actions will likely come at a cost. Overlapping activities may require additional crews, more supervision, increased coordination, and inefficiencies. Reducing activity durations may require additional work days, overtime, more crews or larger crew sizes, added equipment and mobilization expenses, increased commitment from subcontractors, or different means and methods than originally planned. The contractor should consider and quantify these costs when preparing a recovery schedule to determine the least costly changes that can be made to reduce the project duration. Further, an evaluation of multiple options equating the amount of time that can be recovered to the cost of each day saved provides a rational basis for determining not only how to shorten the schedule, but how much time should be cut. As the schedule is shortened and more activities become critical, maintaining that schedule may become more difficult because a delay in any critical activity can undermine the acceleration effort. For this reason, closely monitoring progress when operating under a recovery schedule is important. More frequent schedule updates may help the project team better manage the schedule going forward because it allows them to more quickly identify and react to additional delays.

6.6. Acceleration Costs Pricing of acceleration claims follows the same general pattern used to price delay claims. Specifically, contractors should determine the additional direct and indirect costs incurred or to be incurred over the performance period, including resequencing, rescheduling, and other impacts that arise from the accelerated effort. The type of costs most peculiar to acceleration claims are

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• Additional labor, equipment, and material (purchase and/or expedited delivery); • Overtime (including accompanying inefficiencies) and premium time; • Additional supervision and/or impacts due to diluted supervision; • Disruption of schedules designed for optimum equipment, manpower, and overhead utilization; • Reduced efficiency due to increased manpower and less time to plan ahead and coordinate work; • Inefficiencies due to stacking of trades; and • Increased potential for rework.

Inefficiency costs are typically computed by comparing costs incurred while engaged in an acceleration effort versus those incurred during a similar period of time and performing a similar scope of work without the acceleration effort. Comparing actual productivity on the project to productivity on the same project for similar work under changed conditions, or a measured-mile approach, is generally considered to provide the most accurate quantification of lost productivity. Actual conditions or data for a measured-mile approach, however, are not always available. In those instances, and where proper comparison of the type of work performed can be made, productivity data for the contractor’s other projects, or even published data, can be used when necessary. One method sometimes used to price inefficiencies, especially for forward-priced claims, is to use statistical data such as those published by the Bureau of Labor Statistics. Appendix 6A lists several references on overtime effects, including a chart from the Bureau of Labor Statistics Report 917, which shows various efficiency losses for different combinations of overtime hours. Further discussion on inefficiency can be found in Chapter 9 and on pricing methodologies in Chapter 11.

6.7. Conclusion With respect to time, mitigation is generally defined as the steps a contracting party takes at minimal or no cost to avoid or reduce delay. Acceleration is also intended to reduce the projected remaining construction time and is typically initiated to overcome prior delay, but it

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comes at a cost. An acceleration order can either be an express direction or implied, as in the case of constructive acceleration. Acceleration can also be voluntarily undertaken by the contractor. When acceleration is not undertaken voluntarily, a contractor should 1. Request that the owner’s direction to accelerate be issued in written detail; 2. Provide notice to the owner that the contractor is accelerating; 3. Reserve its rights if the contractor believes it did not cause the need to accelerate; 4. Provide the owner with options regarding how the acceleration will be accomplished and how much time each option will recover; 5. Maintain accurate records of additional costs associated with the acceleration; and 6. Make a timely request for an equitable adjustment to the contract. When coupled with the existence of excusable delay and a timely and properly submitted request for time extension prior to the acceleration effort, a contractor may be entitled to recover acceleration damages from an owner in directed or constructive acceleration scenarios. When actually engaged in the acceleration effort, contractors should concentrate on the critical path of the schedule, revise schedule logic to perform critical activities concurrently rather than sequentially (where possible), and reduce the duration of the critical activities as necessary, beginning with the activities that can be reduced with the least cost. As the acceleration continues, contractors should monitor and update the schedule more frequently so that any additional schedule slippage can be identified and corrective action taken in a timely manner.

Appendix 6A: Overtime Statistics Figure 6A-1 and the following references provide statistics about labor and overtime: “Field construction, loss of productivity curves.” United Engineers and Constructors, Inc., Philadelphia, PA. Howerton, J. (1969). “Do you know the hidden loss of overtime?” Qualified Contractor.

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Mechanical Contractors Association of America, Inc., (2003). “How much does overtime really cost?,” Bulletin No. OT 1, Rockville, MD. NECA (National Electrical Contractors Association) (1969). “Overtime and productivity in electrical construction.” A report on a continuing study by the National Electrical Contractors Association, Bethesda, MD. The Business Roundtable. (1975). “Scheduled overtime.” Coming to Grips with Some Major Problems in the Construction Industry, Washington, DC. U.S. Department of Labor. (1947). “Hours of work and output,” Bulletin No. 917, U.S. Government Printing Office.

Figure 6A-1. Productivity As a Function of Workdays per Week and Work Hours per Day. Source: U.S. Department of Labor (1947)

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Endnotes 1. Greulich, Inc., ENGBCA No. 3832, 78-2 BCA ¶ 13,417; see also ACE Constructors, Inc. v. United States, 70 Fed. Cl. 253 (2006). 2. Norair Eng’g Corp. v. United States, 666 F. 2d 546 (Ct. Cl. 1981). 3. A. Teichert & Son, Inc., ASBCA No. 10265, et. al., 68-2 BCA ¶7,175; see also Donald R. Stewart & Associates, No. AGBCA 89-222-1, 92-1 BCA ¶24,705 (holding that the government’s request for a revised schedule did not give rise to an acceleration claim in the absence of a contractor claim for excusable delay). 4. Hyde Constr. Co., ASBCA 8393, 1963 BCA ¶3,911. 5. Electronic & Missile Facilities, Inc., ASBCA No. 9031, 1964 BCA ¶4,338. 6. Sylvania Elec. Prod., Inc., ASBCA No. 11206, 67-2 BCA ¶6,428. 7. Brock & Blevins Co. v. United States, 343 F.2d 951 (Ct. Cl.1965); see also Blake Constr. Co., Inc., ASBCA No. 39937, 90-3 BCA ¶23,196 (finding that failure to grant an appropriate time extension was a constructive acceleration of the schedule). 8. Greulich, Inc., ENGBCA No. 3832, 78-2 BCA ¶ 13,417; see also ACE Constructors, Inc. v. United States, 70 Fed. Cl. 253, 280 (2006). 9. FAR 52.236-15 (b).

Chapter 7

Records and Documentation Robert M. Freasa and W. Wesley Grover IIIb

7.1. Introduction Records and documentation play a significant role in the successful settlement of contract claims. The daily events and details of the job should be documented to adequately substantiate claims and prove damages. Facts must be recorded accurately and preserved. Armed with a carefully prepared claims package of facts and data, the contractor can support its position and propel negotiations toward a favorable settlement. Too often, however, contractors fail to create good records and/or retain the records that were created. Procedures may be set up properly and files may be stuffed with documents, but frequently the details of daily performance and events are inadequately recorded or not readily accessible, if available at all. This is understandable, because most construction personnel are more concerned with the construction effort than with keeping records, but it is also potentially damaging. Conversely, the owner or its representative, having more time available for administrative tasks, is more likely to keep records and be better prepared to defend against claims. In addition to understanding the types of project documents that should be retained, employees must also understand which communications are not appropriate. This is especially true with the explosion in a

Principal, Exponent, Inc. Senior Manager, Exponent, Inc.

b

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the use of social media and other electronic communication by all levels of employees.

7.2. Types of Records The different types of records to keep in the daily conduct of business include original estimate and budget files, design changes, contract and change order files, daily reports, meeting minutes, time cards, payrolls, material receipts, purchase orders, invoices, cash flows, correspondence (both formal documents and informal electronic media such as e-mails and texts), photographs, schedules, and job cost report files. Maintaining a good project record is not only good business, it is an absolute necessity when the time comes to accurately price changes and claims. How can changed work be priced if the cost of doing base contract work is unknown? Keeping accurate records of costs for equipment, overhead, direct cost items, and work orders is very important. Detailed records of direct costs associated with specific work items simplifies use of such information at a later date. If the contractor combines too many different cost items into a single job cost account, the data can become meaningless particularly when used to prepare analysis of damages.

7.3. Bid, Estimate, and Budgets The original job estimate should typically form the underlying basis of the bid upon which contract award was made. Backup documentation should support the estimate to establish the total estimated costs for the original contract price or amount. The estimate should be prepared and organized in a manner that promotes easy review for accuracy and use by the project management team. The estimate also serves as a source document for the initial setup of the project’s job cost account system coding structure and budgeted costs. Cost estimates could become one of the key foundational documents should a claim arise during project execution. The information contained in the estimate and supporting documentation can be used to establish the contractor’s original quantities, production rates, and anticipated costs. If sufficient detail is available, the estimate also can be used to establish the contractor’s original plan for executing the work.

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Most job cost accounting systems allow the contractor to record budgeted costs and compare them with actual costs. The original budget, therefore, becomes the source data for the initial inputting of budgeted costs into the job cost accounting system. As mentioned earlier, the original budget should tie back to the bid and estimate documentation. Any contingencies that were originally recognized also should be incorporated into the budget data. The budget should be developed at a level of detail consistent with the cost coding reflected in the job cost accounting system and with any billing or contractual requirements.

7.4. Time Cards The time card, which usually serves as the input source for the job payroll, is the basic document for recording an individual’s time spent working on a particular project for each payroll period. It establishes which individuals worked on any given day and for how long. It establishes the number of hours worked overtime, if any, and documents the number of hours worked on each task performed that day. Each task or item worked should be coded to correspond to the cost code reflected in the contractor’s job cost accounting system. Additionally, the time card can be used to record daily production for each item worked if units installed are recorded along with the actual time expended. However, many contractors prepare separate production reports to track actual productivity. Time cards are usually prepared at the foreman level and then later reviewed by supervisory and administrative personnel.

7.5. Job Cost Accounting System The job cost accounting system, which is the computer application that project costs are entered into, should include the same activity list that was contained in the original estimate. In other words, assuming the estimate was made in sufficient detail, the cost coding breakdown should bear some resemblance in format to the system used in the bid estimate. With the bid estimate loaded into the cost accounting system, performing a variance analysis when activity completion percentages are known is somewhat easy. For example, if early in the project the actual

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cost of an activity is 30% of the activity’s total bid estimate but only 20% of the work has been completed, the contractor should view this as a signal to investigate the work being performed and the associated costs. This budget-to-actual cost variance, also commonly known as “earned value,” could be an early sign that issues not contemplated in the bid are affecting the activity. To the extent that the cause of the variance is the responsibility of the owner, the contractor should timely notify the owner and request a change order for the impact. At the end of the project, the variance analysis will show project activities where the actual costs underran the budget and those that overran the budget. This information also can be useful to the contractor in refining the cost estimate for performing these activities on future projects. Because the bid estimate is only an estimate, contracting agencies hesitate to allow the bid estimate to serve as the sole basis for claiming extra costs, but under extreme circumstances it may be the only reasonable method available. With delays, suspensions, and accelerations, the preferred method to support claimed cost involves very intricate analyses of production or efficiency rates, overhead, and equipment costs that must be prepared and analyzed before contracting agencies or jurisdictional bodies will award equitable adjustments. Occasionally, awards are based on the estimate in what is known as the total-cost or modified total-cost method, which is usually based on one of the following methods of comparing costs: • Actual cost to perform compared with the original bid estimated cost to perform, • Actual cost to perform compared with a “reasonable” estimated cost to perform, and • Actual cost to perform compared with actual cost of identical work performed under normal conditions on the affected project or another similar project.

Keeping these methods in mind, the contractor will want to establish a record- and cost-keeping program that allows ready implementation of any or all of these methods. Special care should be taken to maintain consistency of the cost reporting system during the course of the project. If a new system is implemented after the project has started, the contractor must maintain the data from the old system and fully document the transfer of data to the new system and those project costs that were not transferred.

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7.6. Production Reporting In the case of loss of efficiency claims, one of the preferred methods for calculating and quantifying that loss relies on actual production rates. To utilize this method, having access to actual production data, which typically include information about actual labor and/or equipment hours and the corresponding actual work units installed, is essential. For example, if an electrical contractor is experiencing losses while installing feeder conduit, the contractor will want to have recorded actual hours incurred installing feeder conduit and the quantity of feeder conduit installed. To have ready access to this information, the contractor must establish a reporting procedure to capture the production data. Sometimes, this information is recorded as part of the daily reports prepared under the contractor’s supervision; however, it can be recorded in a separate report. When developing procedures for preparing production reporting, considering the following is important: • Time interval—the preferred period is daily for most projects; • Tracking of discrete work activities that tie back to the cost coding in the job cost accounting system; • Discrete identification of labor and equipment for each work activity; • Location of work performed (e.g., floor, level, area, etc.); • Define the criteria to be used to determine when each commodity is credited as being partially and fully installed; and • Identification of known impacts affecting performance of the work.

To demonstrate actual costs, producing unit costs or production rates from computer reports is insufficient. Contracting agencies and savvy owners require detailed documentation that shows actual crew sizes and equipment, which is where periodic production reports can come in handy to provide proof of actual production. The valid documentation of production rates and job progress, and a descriptive narrative showing cause/effect relationships between changed conditions and extra costs, also are needed. Therefore, having detailed and accurate records and production rates is very important. For example, when a contractor’s records prove it was capable of pouring 250 m3 of concrete daily, these data will work wonders when claiming extra costs to show that, due to a

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changed condition, it could only pour 100 m3 , or that triple the resources were required to achieve the same production rates to counter the effect of a changed condition.

7.7. Material and Delivery Receipts Having detailed records of all material transactions and deliveries is important. The contractor must be able to prove that it procured permanent materials and equipment and temporary construction materials in a timely manner, that it kept an inventory of materials, and that it took all steps within its control to keep material delays to a minimum, thus avoiding unnecessary delays and potential price escalations. These material records, including purchase orders and invoices, are required to verify escalation costs and are necessary to establish proof that the contractor did not cause delays due to failure to have material on time. These records also serve as the basis on which escalation determinations are made and the amounts that will be allowed. Once material transaction activities have been accomplished, the availability of materials and equipment is sometimes a driving predecessor activity to the installation of those materials or equipment into the project. To establish actual delivery or receipt dates, a record of material and equipment deliveries to the jobsite should be maintained. These documents typically are reviewed and utilized in the analysis of delays when activities did not start on time or took longer than planned to complete. Proof that the necessary materials and/or equipment were available in time to perform the specific activity under examination will be questioned. Therefore, material and equipment delivery records should be maintained as part of the project file.

7.8. Schedules and Progress Reporting Scheduling techniques such as the critical path method (CPM) are routinely required in many contracts. The primary value of schedules for claims is their use as a tool to prove or disprove the effect of changes and/or delays on contractual interim milestones and/or the overall project completion. Chapter 8 fully discusses the importance and techniques of schedules.

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From a document-management perspective, project schedules must be retained throughout contract performance. This means that electronic native files and hard copies of each CPM schedule should be preserved for future review and use, if needed. This practice starts with the baseline, or as-planned, schedule and continues through each and every update prepared and submitted to the owner throughout the course of construction, and should include any schedule analyses for changes and delays. In addition to the schedules themselves, most contracts require the contractor to prepare and submit a periodic progress report, or schedule narrative, to present the schedule forecast completion date(s) and to identify specific work activities that are critical to the timely completion of the project at given time intervals, usually monthly. The contractor can also use these periodic progress reports to notify the owner of any issues that are, or will be, delaying the contractor’s ability to progress the work and complete the project on time. Contractors, construction managers, and owners should consider use of a schedule log to track the submission dates of CPM schedule updates and their approval status.

7.9. Cash Flows When the project is in the bidding or planning stage, the contractor will chart projected cash flows for the purpose of computing its financing needs. The revenues and costs expended are tied in with the contractor’s scheduled progress, balancing (unbalancing) of bid items, and the restraints of the contract schedule. Financing costs are real, and when related to changes in the job cash flow due to unreasonable owner delay, they may be recovered when properly documented and verified (for example, interest paid to a bank to specifically finance a change order).1

7.10. Correspondence, Transmittal, and Submittal Logs A good idea is for the contractor to keep up-to-date logs of all correspondence, drawing transmittals, and submittals. These logs should be

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prepared and maintained separately and briefly describe the contents of each piece of correspondence, transmittal, or submittal and, in the case of drawings, revision number. Additionally, these logs should track the sender and who received each piece of correspondence, transmittal, or submittal. This allows the contractor easy access to a specific item and the opportunity to pinpoint quickly those items that are lagging in response or need action. The logs also can serve as references when preparing new correspondence. Logs come in most handy, however, when the contractor must show a sequence of events and demonstrate how actions (or inactions) on the part of the owner played a significant part in a delay or changed condition. Other logs that typically are maintained by the contractor include, but are not limited to, requests for information (RFIs), proposed change order requests (CORs), and site photographs (see Section 7.12 for further details for preparing and maintaining photograph logs). This information is, of course, in the contractor’s files and can be researched when needed for further detail. But, the speed and convenience of having the information summarized in a log pays off when the contractor must periodically prod the owner and/or architect/engineer to process shop drawings, approvals, change orders, and claims on a prompt basis. Commercial software is available to manage this process.

7.11. Daily Reports Daily reports—including diaries, production records, and general job progress reports—are the most important records available to document actual performance and events or demonstrate adverse job conditions. Michael S. Simon, a New York attorney and author of legal reviews for Engineering News-Record, says, “I need to know what happened, when it happened, why it happened, who caused it to happen, and what we did about it. I need to know all of this on a daily basis. As your legal counsel, I must say that no single document is more important than your daily reports. The reports are often crucial to the outcome in negotiations or in court. Write true and complete daily reports. No one expects a job without problems. It’s essential to write down all the facts that exist.”2 As a matter of routine practice, supervisors, superintendents, project engineers, and project managers should keep daily diaries, recording information about where they worked; what and how much was done;

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instructions from inspectors, the architect/engineer, or the owner’s representative; visitors to the jobsite; weather conditions; any unusual or differing site conditions; all work done by subcontractors at what location (or an activity reference tied to the project’s CPM schedule); any delays or problems encountered; and/or extra work performed. The project engineer or project manager should receive a copy of all diaries for compilation into a single consolidated daily report reflecting the described information and data. If the subcontractor is not recording its daily resources on site in a separate document, the contractor should include this information within its own daily reporting records. Should the contractor then need to prepare a claim, the daily reporting maintained by the project team will prove to be invaluable in establishing when work was actually performed on a daily basis. For time-related claims, the contractor may be required to prepare a daily specific as-built schedule (DSAB) to analyze its performance. The contractor’s daily reports typically are the most requested source document for preparing the DSAB. Depending on the size and complexity of the project, the contractor may want to consider preparing and maintaining a database or spreadsheet to record the information contained in the contractor’s daily reports. The advantage of maintaining the daily report information in this way is the analytical tool that database programs and spreadsheets provide for sorting and filtering the information. For example, if the need arises to review a particular subcontractor’s performance at a particular location, the database can easily provide that information, avoiding the need to manually search through hard copies of the daily reports to locate the information in question. In addition to their value as an information source for upper management, accurate daily production records are very important for claims, because they lend credibility to the statistics in computer reports. The costs that go into the computer via time cards and invoices should be recorded against production accomplished contemporaneously to generate accurate unit costs for the work done. Devising special reporting procedures and forms to ensure that production is recorded daily and accurately is usually advisable. Appendix 7A shows one example of such a form used to record track-work production on rapid transit rail systems. Appendix 7B shows a copy of a form used to demonstrate the disruptive effect of extra work and interference on the track-work contractor for the project. This form compiled excerpts of problems from the different diaries of the supervisors and the project engineer

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and helped greatly to substantiate the cost effects of reduced efficiency on the project. These forms, as a matter of practice, can be prepared and maintained utilizing electronic spreadsheets and databases. In addition to the daily report, the time card also serves as a means for the supervisor or foreman to record daily occurrences, such as unusual site conditions, weather, delays, accidents, safety aspects, subcontractor problems, and other current or potential problems.

7.12. Photographs and Videos Photographs provide one of the best—if not the best—record of job progress. The contractor should endeavor to take pictures of representative samples of job progress regularly, preferably no less than weekly, or more frequently if needed. With digital photography in wide use today, these photographs should be kept in organized folders on the contractor’s project server where backups are routinely performed. Such photographs will frequently assist in substantiating events and aid in describing construction activities and the layout of the site to those not familiar with the project. Depending on the project, setting up a camera to take time-lapsed photographs from the beginning through the end of the project may be advisable. The time-lapsed photographs are very beneficial if a dispute arises in determining the status of construction at various points in time. When using digital photography, the contractor should ensure that the photographs are digitally dated, and in some cases time stamped. Additionally, a log should be maintained for each photograph that records the following information: • Photograph number (the specific format should be tied to the filename of the electronic photograph); • Date the photograph was taken; • Who took the photograph; and • A brief description of the location, what the photograph depicts, and the orientation of the view.

In a claims situation, photographs can be used to verify the existence of prior or changed conditions, describe characteristics of the worksite under different conditions, and present a factual recording of methods

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and equipment employed to accomplish different items of work. Pictures also can be used to show cause-and-effect relationships of changes and to demonstrate the type of extra costs involved. For example, a picture can show how an added structure to a contract caused the need to reroute access roads to another portion of the job through other contractor operations and a swampy area not originally anticipated (and not shown on the contract drawings). In simpler terms, a photograph can be used to demonstrate what work was, or was not, completed by the contractor on a given date or at a given time. In a chronological presentation, photographs also can show how work either progressed or did not progress according to the contractor’s schedule. In the case of videos, the contractor should use a similar practice of identifying and logging each video as the previously described photographic logging procedures to maintain the integrity and credibility of these electronic data. Contractors also should consider video recording any high-risk activities (e.g., big lifts, and possibly from multiple angles, or equipment testing). These videos will be very valuable if an incident occurs.

7.13. Special Forms for Change Orders and Claims The contractor should have a change order request (COR) form for each change or potential claim encountered and should immediately complete the form upon observance of the change or claim situation. The COR should be used to record all important historical events of the change order, including pertinent dates, such as the date each situation was observed, date of information requests, dates work was performed, date notice was given, date a price proposal was submitted, and date(s) of negotiations. The COR also indicates the nature of the claim and type of extra work to be performed, potential costs and impacts, evaluation of effect on subcontractors, pertinent points on negotiations and conditions of settlement, and any other information relevant to the change order. (Appendix 7C includes a sample COR form.) Having an accurate history of each change is important to successfully resolve each change order in the face of fading memories, changing personnel, and an increasing pile of project administrative records. In the case where the contractor is directed to proceed with work that the contractor believes is a change, the contractor should record its

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efforts in an extra work form so the specific details regarding the contractor’s actual efforts are recorded on a daily basis. If changed or extra work is being performed at multiple locations, multiple forms are recommended. Additionally, the contractor should attempt to obtain the owner’s acknowledgment of the changed or extra work performed on a daily basis. In the case of a subcontractor performing changed or extra work, the subcontractor should seek the contractor’s acknowledgment of the changed or extra work performed on a daily basis. Although either of these acknowledgments will likely not be perceived as approval of a change order or claim, it does establish for the record what specific work was performed by the contractor should entitlement to a change be recognized at a later date. This form should identify and quantify the actual work performed; the specific location; and the contractor’s labor, material, and equipment utilized on each day of work to perform the changed or extra work such that the activity can be priced out later. A separate file should be kept for each change, with a copy of the initiation form, pertinent correspondence, associated invoices, extra work forms and/or time cards, memos-to-file, and any other items relevant to the change order or claim. Keeping a separate folder exclusively for copies of all initiation forms is also advisable. This will serve as a handy reference when making periodic reviews of the status of job claims and change orders. To keep the owner informed of the status of unresolved change orders and claims, the contractor should prepare and submit a periodic (e.g., weekly or monthly) status report to the owner reflecting the open and unresolved change requests and/or claims. The purpose of such a report is to show the owner and/or its representatives which items are still in progress, which are awaiting the owner’s and/or architect’s/engineer’s action, which are ready to be negotiated, and which are negotiated and awaiting formal modification. (Appendix 7D is a sample of this form, and Appendix 7E is a sample cover letter.) Graphs and charts also are effective in analyzing, substantiating, and presenting contractor claims. Project schedule diagrams, trend diagrams, cash-flow charts, partial payment charts, contract work-hour charts, productivity measurement charts, extra work order work-hour charts, and the DSAB and job progress charts (actual versus planned) are some of the more common charts that have proven to be valuable in presenting a contractor’s claims. Such charts, usually plotted against time, serve as indicators of overall job impact of the disruptive effect of delays,

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suspensions, accelerations, and multiple change orders. These charts and the data behind them may be useful for obtaining interim payments for delays, suspensions, or accelerations, because they have a strong visual impact in showing the detrimental effects of such actions.

7.14. Periodic Reviews In addition to updating the project schedule each month and producing a change order status report, the contractor should endeavor to have a formal review session of all these items to determine whether any actions have been overlooked or whether additional actions need to be taken. One example of such a formal monthly program follows: 1. Review the project schedule to determine whether the contractor’s (and subcontractors’) progress over the previous month has been timely. If not, identify the specific reasons why and what actions can be taken to recover or mitigate that lost time. 2. Review daily diaries, daily production reports, and/or cost reports to identify any potential impacts on productivity and costs. 3. Identity causative factors and their effect on overall contract work and make a rough estimate of increased costs to date and forecast any remaining potential cost increases, if possible. 4. Review and summarize potential or executed change orders to determine their effect on progress and costs. Identify change orders that have or will have an impact on time of performance or productivity. Should the contractor determine that any specific change order will have an impact on time or productivity, the contractor should address that impact as part of the change order, or reserve its rights to address those impacts once they can be quantified. 5. Study all major sources of delay and inefficiencies to determine the difference in cost of actual work versus the original estimate/ budget. 6. Consolidate all of the aforementioned information into a file and prepare a monthly report. All or portions of these monthly observations and findings can be utilized to prepare notice letters to the owner of potential changes or claims.

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The information and documents described in item 5 serve as useful references during the job and at project completion. Not only for claims purposes, but as a quick lookup for other aspects of the project, the summary of monthly claims can be useful for evaluation and support of cumulative impact claims. Contractors should not wait until the end of the project, however, to file delay and/or impact, or extra work claims, but they should try to prepare and file them as they are incurred, or at least give notice of the potential claims. The previously described materials can be useful for absolving liquidated damages, requesting contract time extensions, or filing an overall impact claim of any loose ends not resolved during the course of project execution. It must be emphasized, though, that this is a last-resort procedure. Filing and settling all claims as they are incurred is preferable, but the aforementioned program should still help to identify potential claims as they arise and keep the claims situation current and under control to the extent possible.

7.15. E-Mail and Social Media The use of e-mail has become a very common form of communication, not only between project personnel, but also for intradepartmental communication and communication outside of the company, such as with subcontractors, vendors, owners, and regulatory bodies. As such, companies must have procedures in place to retain e-mails. This is especially true when e-mails are the only evidence of the transmittal of project documents. However, the retention of e-mails can be a double-edged sword. While pertinent project communications will be retained, so will inappropriate communications. All too often, project personnel send e-mails containing off-color jokes or comments about their view of project issues and strategies and incompetency of project personnel. Unfortunately, e-mails are not the only method of transmitting inappropriate communications. With the wide use of numerous social media sites—such as Facebook, Twitter, LinkedIn, Tumblr, and YouTube—and the prevalence of blogging and instant messaging, company personnel at all levels have numerous avenues to create and disseminate inappropriate and sensitive information. Therefore, the company must educate and train

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its employees about the proper use of e-mail, social media, and other forms of electronic communication.

7.16. Document Management In recent years, a trend toward paperless construction projects has occurred. While the approach helps expedite the transmission and availability of the most current drawings, change orders, etc., there are issues that must be addressed and that employees must be aware of. Some of these issues are who controls the central server that stores the data; who is granted access to upload, download, update, and view each type of data; and what information is contained on the server. Whether a project is paperless or not, proper document management is beneficial on a construction project and will be helpful if a dispute arises. Many software programs can assist with managing project documents. Some of the features of these programs include document control alerts and tracking; file management, where related documents can be linked; tracking and control of the procurement process; budget and cost control functions; maintenance of field records such as daily reports and inspections; logging of e-mails and correspondence; and production of standard reports. Regardless of the system used to manage the project documents, having adequate procedures, ensuring that project personnel are trained on the procedures, and ensuring that the procedures are followed on a consistent basis are critical.

7.17. Conclusion The contractor typically bears the burden of proof that it is entitled to its claims, and for that reason it is typically essential to provide documentation that supports the costs and damages it seeks. Therefore, the importance of documentation cannot be overemphasized. The better the quality and completeness of the documentation and the organization of the documents, the less costly preparing claims will be and the better the chance of more timely and favorable settlements. It’s that simple.

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Appendix 7A: Daily Production Report Form (Sample Form) Contract 8A0033 Trackwork Constructors, Inc. Ballast Track Production Report Job #204 Report No.: ____ Date: ___/___/___ Working Day No.: ___ Weather: ______ Operation* Excavation Embankment Subgrade preparation Subballast Top ballast (first lift) Distribute ties and track material Lay rail Gauge and spike Ballast (top off) Raise and line Adjust and anchor Other work

Route

Track

Lane

From

To

Quantity

Comments

Additional Information: Contract No.: ______________ Today’s Date: ________ Weather: ________ Temperature Range: _ AM: ______ FM: ______ Contractor’s Job Hours Staff: Supervisory Craftsman Location *Work Performed Worked

Subcontractors on Job: Contractor: Supervisory

* Should correlate

Craftsman

Job Location

Work Performed

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Appendix 7B: Job Report Summary of Effect of Disruptions and Interference (Sample Form) Contract 8A0033

Date

Trackwork Constructors

Excerpts taken from Supervisor and Management Daily Diaries Entered Disruptions Entered by by

Number of Shifts

___

Extra Work Volume Direct Work Volume

Miscellaneous Comments:

= _________ %

Summary Narrative of Extra Work and Disruptions on Ballasted Track Week Ending: ________________ Extra Work

Extra Work Volume Total Work Volume

= _________ %

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Appendix 7C: Change Order Initiation Form CHANGE ORDER REQUEST (COR) FORM Instruction Sheet To establish a well-organized and complete claims and change order program, having an accurate and detailed history of each change is necessary. To ensure that such a history is set up and maintained, the attached form shall be put into effect each time a potential claim or change order is identified. This form should be made out by the project engineer or his or her staff. Such a record will ensure that all necessary background information is documented and that necessary actions are taken. Such a record will greatly aid in the composition of proposals and in support of negotiations. It will also assist the project engineer in ascertaining that supervisors and subcontractors are aware of changes and that proper actions on their part are being taken. Last, such a record will help in making and maintaining more accurate cost–revenue forecasts. A work order number should be established each time a potential claim or change is identified, or a change order issued, whether or not any costs will be incurred. This will ensure that every contract modification has a cost account number to facilitate job accounting procedures. The attached form should be attached to each extra work order folder. A separate notebook containing all extra work orders should be maintained for ready reference. Additionally, a copy should be given to the project manager for his or her information and concurrence upon initiation of each extra work order number.

Records and Documentation

Trackwork Constructors CHANGE ORDER REQUEST (COR) FORM _____________________________________________________________________________ Owner’s Change Order No.: ____________________ Date: __/__/__ Contractor’s Extra Work Order No.: ________ Contract Modification No.: _______ Date Modification Received: __/__/__ ______________________________________________________________________________ Title of Change: ______________________________________________________________________________ Description: (What, where, which, why, who, how; refer to specification and contract drawing) ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Directed to Do Work (by Whom and How):____________________ Date __/__/__ Notice Given to Owner:_______________________ ____________ Date __/__/__ Proposal Submitted:__________________________ ____________ Date __/__/__ Proposal Resubmitted:________________________ ____________ Date __/__/__ Negotiations Begun:__________________________ ____________ Date __/__/__ Negotiations Complete:_______________________ ____________ Date __/__/__ Settlement Amount:__________ Time Extension: _____________ (Calendar Days) ______________________________________________________________________________ Notification to Staff and Supervisors_______________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Distribution of Drawings_________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Related Project Documents (e.g., Request For Information, Construction Change Directives, Sketch by Architect, etc.)_______________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Potential Effect on Subcontractors_________________________________________________ _______________________________________________________________________________ ______________________________________________________________________________ Response from Subcontractors____________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Potential Time and Cost Impact on Job (Refer to CPM Schedule)_______________________ ______________________________________________________________________________ ______________________________________________________________________________ Estimated Cost (Ballpark Figure) $______________ Time______________ (Calendar Days) Comments_____________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Concurrence: Project Engineer________________________________________ Date __/__/__ Project Manager____________________________________________________ Date __/__/__

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Date ____________

Change Order Status Report No.____________________________________

Proposal Modification Submitted Extra Work Order Change Order Date Date of Request Date of Receipt of Projected Cost Date Remarks # # Initiated Description to Proceed Notice to Proceed (Ballpark Figure) Date Amount Negotiated No. Amount (Current Status)

Contract No. ______________________________

Appendix 7D: Change Order Status Report (Sample Form)

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Appendix 7E: Change Order Status Report Cover Letter TRACKWORK CONSTRUCTORS, INC. P.O. Box City, State, Zip April 8, 2007 Ref#: 433 Owner’s Representative, Inc. Main Rail Yard Project Street Address City, State, Zip Attention: RE:

Mr. A. Jones Resident Engineer

Contract Number 8C0033 Change Order Status Report No. 24

Gentlemen: Submitted herewith is our monthly Change Order Status Report No. 24 outlining the current status of all unresolved claims and change orders. We call your attention to the following figures and request you take whatever action necessary to process these items into contract modifications. 1. Outstanding Change Orders ___. 2. Outstanding Work Order Accounts ___. These ___ represent, in addition to the outstanding change orders in (1) above, a combination of directives by the resident engineer (RE), claims by Trackwork Constructors, and changes initiated by us with the RE’s concurrence. All but ___ of these have been reduced to writing, yet there have been no change orders issued for any of them by the owner. 3. Trackwork Constructors has submitted cost proposals for ___ outstanding change orders (totaling $_____) and ___ outstanding work orders (totaling $_____) for a total dollar value of $_____. 4. The remaining claims and change orders represent a projected total dollar value of $_____, of which $_____ has been expended by us to date. We expect to have proposals for these items to you shortly. 5. Outstanding time extension requests not associated with any of the previously referenced changes and/or claims. We look forward to your earliest attention to these open items. Thank you. Very truly yours, B. Johnson Project Manager

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Endnotes 1. See Keco Industries, Inc., ASBCA 15181, 15,547, 72-1 ¶ 9576; Keco Industries, Inc., ASBCA 15131, 72-1 ¶ 9262, and Sun Electric Corporation, ASBCA 13031, 70-2 8371; also see Servidone Construction Corp. v. U.S., 931 F.2d 860 (Fed.Cir. 1991) (contractor entitled to recover interest paid on funds borrowed to perform changed work where there was proper documentation and segregation of the funds). 2. Michael S. Simon, “The Importance of Proper Daily Reports,” Constructor, December, 1976 (Washington, DC, Associated General Contractors of America), p. 16.

Chapter 8

Use of Project Schedules and the Critical Path Method in Claims John C. Livengooda

8.1. Introduction Customarily, a contractor creates, whether contractually required to or not, a progress schedule that defines how the job will be performed and submits regular updates to measure actual progress and reaffirm established completion dates. Schedules can take the form of bar charts, flowcharts, or critical path method (CPM) network diagrams. During actual performance of the job, other schedules can come into play, such as short-interval or look-ahead schedules, which break larger overall project schedules into more detailed tasks for immediately upcoming phases of work. Generally, these schedules are used to plan the work and, later on, are used to analyze and determine responsibility for delays encountered on the project. Because CPM schedules are frequently used on larger projects and analysis of CPM schedules is often specified as the means to substantiate delay and acceleration claims, this chapter discusses the use of CPM schedules to analyze time-related claims and changes.

a

Managing Director, Global Construction Practice, Navigant Consulting, Inc. 175

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8.1.1. Description of CPM A CPM schedule is a planning and scheduling method that employs complicated mathematical algorithms to calculate the specific mathematical relationship between different activities: A CPM is created by dividing the entire project into discrete and quantifiable steps; in turn, each step is allocated an estimated time for completion. Ultimately, each step is arranged into a chronological sequence, thus revealing the anticipated length and structure of the entire construction schedule. In addition to serving as a road map for the contractors to determine when and where their work fits into the overall construction sequence, the CPM also assists contractors in assessing their hiring and material purchasing needs.1

While a CPM schedule can be displayed in many ways, the most common depiction of a CPM schedule is to graphically plot it as a network diagram, similar to a flowchart or bar chart, to show all job operations in the logical sequence necessary for orderly completion. Engineering author Richard H. Clough best summarizes what the network diagram does and its advantages: “The network diagram portrays, in simple and direct form, the complex time relationships and constraints among the various segments of a project. It has the tremendous advantage of easily accommodating modifications, refinements, and corrections.” According to Clough, the network diagram and the underlying facts and assumptions used to create the network provide the project manager with the following invaluable time-control devices: • A means to predict with reasonable accuracy the time required for overall project completion; • Identification of those activities whose expedient execution is crucial to timely project completion (called critical activities, hence the name of the method); • A guide for project shortening when the completion date must be advanced; • A basis for scheduling subcontractors and material deliveries to the jobsite; • A basis for balanced scheduling of manpower and construction equipment on the project;

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• Rapid evaluation of alternative construction methods; • A convenient vehicle for progress reporting and recording; and • A basis for evaluating the time effects of construction changes and delays.2

While CPM scheduling was developed in the late 1950s and used on major projects, such as the Apollo moon launch in the 1960s, its use on anything but the largest and most complicated projects was rare prior to 1980 because of the size, cost, and complexity of computers during that period. As a result, on projects that were managed using CPM schedules, such as those built by the power and process industries, the jobsite personnel worked with schedules that required substantial effort to update, had somewhat limited ability to be modified, and often were not available for review until several days after changes or updates were integrated into the schedule. For these reasons, updated schedules were often developed only to satisfy contract requirements. With the advent of personal computers in the early 1980s, desktop CPM scheduling programs became available at more reasonable cost and at various levels of complexity. Slowly more contractors came to use these programs as an interactive scheduling tool, such that by 2014 a substantial percentage of all construction projects, the smallest excluded, use CPM scheduling as a management tool. Today, the two most commonly used CPM scheduling computer programs are Primavera by Oracle and Project by Microsoft. The contractual requirements for use of CPM scheduling have mirrored its rise in frequency of use, such that virtually all construction projects of any size require the contractor to use CPM scheduling. The current CPM scheduling programs permit sophisticated cost, resource, earned value, and what-if studies to be performed, greatly increasing the usefulness of such programs.

8.1.2. Obstacles to Use of CPM for Construction Scheduling Through the 1990s, many contractors resisted using CPMs, not because they found the information unhelpful, but because several issues rendered its use difficult or not cost-effective. As the availability of CPM programs grew, these obstacles were largely overcome. A primary challenge of CPM scheduling is that it requires the contractor to study its operations in detail, with careful planning and sequencing of work. The contractor must, in a very short period at the beginning of the job, plan its construction methods for a job that may

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have taken years to design and will take even longer to build. Because the CPM schedule is predicated on the logical relationship between activities and specific task durations, obvious errors can be identified and corrected during preliminary schedule development. However, because CPM programs have become more complex in recent decades, the opportunity for subtle errors or hidden mistakes can occur and are harder to find. For example, these mistakes often arise in “incorrect” logic between activities or in the “late dates” of activities. A written schedule allows owners and subcontractors to scrutinize the contractor’s planned operations. These data can become a doubleedged sword. On the first edge, greater collaboration among the contractor, owner, and subcontractor can make for a better-managed project. The other edge also allows those same parties extensive insight into the contractor’s plan, leaving room for self-serving owners and subcontractors to take advantage of that detailed knowledge. Even though most commentators agree that the cooperative model is superior, some contractors still resist distributing their CPM schedules.3 Other potential issues associated with CPM scheduling that arise frequently include • Preparation of a good CPM schedule requires substantial work and effort to maintain its accuracy and relevance. Some contractors find maintaining a proper CPM, which involves detailed stating of activities, estimation of remaining durations, and reconsideration of logic sequence if changes occur, to be more effort than it is worth. Again, most commentators believe such a view is extremely shortsighted.4 • Inexperienced project staff sometimes finds CPM schedules less useful when out in the field juggling resources and adjusting for actual events. Again, project management experts believe that precisely these changing events make schedules more useful and more essential. • Most projects can be executed in multiple ways. CPM schedules reflect one specific way, and sometimes contractor or owner staffs have different ideas as to the proper sequencing of work. These different opinions must be reconciled prior to the issuance of a CPM schedule. • Current CPM software packages allow so much flexibility in how logic connections are made, how calendars are used, and how activities are depicted, that some commentators have complained

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that CPM scheduling can obfuscate and misrepresent the sequence of work.5 Related to this concern is the observation that actual planning of a project, usually performed by experienced construction professionals and then converted into a CPM schedule, can be replaced by inexperienced staff manipulating the CPM scheduling software.6 While these concerns may be valid, the benefits of CPM scheduling most often far outweigh the obstacles. In some cases, additional resources, training, and/or the use of a simplified or alternative schedule made specifically for the use of field personnel can address these issues.

8.2. Use of CPM in Claims Analysis CPM schedules are essential for determining project impact arising from time-related problems, such as delays, suspensions, or accelerations. “One established way to document delay is through the use of Critical Path Method (CPM) schedules and an analysis of the effects, if any, of [owner]-caused events upon the critical path of the project.”7 Changes that add or delete work and differing site conditions may also have a time impact on the contract that CPMs can demonstrate. To best analyze the effect of such situations, the CPM is the most often used tool to measure the relative impact of different time factors on project completion. The use of CPMs has long been accepted by the boards and courts8 so long as • The baseline and update schedules have been established as reasonable and accurate. • The schedule has been updated and maintained during construction in accordance with the specifications. • The analysis is employed in an accurate and consistent manner in accordance with acceptable forensic scheduling theory, including adjustments for contractor-caused and concurrent delays. • A cause-and-effect relationship between actual events and delays to the job is shown.

CPM schedules provide a powerful tool that can illustrate the results of events and delays on the project. This illustration often takes the form

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of a graphically depicted bar chart that permits all parties to observe the sequence of events to date and the projected effects of those past events. While detailed data contained within the CPM schedule support the bar chart, the graphic illustration is useful for understanding and calculating the cost and time impacts resulting from a change order, suspension, delay, or disruption. In some cases, the submission of CPM schedule updates can serve to fulfill contractual notice requirements. However, parties are advised to follow the contractual requirements closely in providing a required notice. The basic intent of CPM forensic schedule analysis (FSA) is to show the impact of delay by comparing actual performance (as-built) with planned performance (as-planned). Such analysis must consider many elements of the CPM schedule, including float, multiple critical paths, concurrent delay, acceleration, and early completion. These issues and the various methods of FSA are discussed in the following sections.

8.3. Pitfalls to Avoid in CPM Claims Analysis FSA is used most commonly to depict delays along the critical path of the project and delays that result in late completion of the project or some portion of a project: If work on the critical path was delayed, then the eventual completion date of the project was delayed. Delay involving work not on the critical path generally had no impact on the eventual completion date of the project.9

While FSA usually focuses on events along the as-built critical path, FSA is also used to identify acceleration, concurrent delay, and pacing and productivity impacts. All these potential cost or delay issues can be caused by abnormal weather, change orders, equipment delivery, poor productivity, strikes, owner interference, defective design, or other job impacts. Ideally, as the CPM schedules are updated monthly, these events should be identified in the CPM, adjustments to future performance made, and claims or notices subsequently filed as necessary. Failure to prepare or update the CPM properly during construction can be cause to invalidate its use in substantiating a claim. In rejecting one contractor’s claim, a board of contract appeals noted

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The work sequence shown was not used in estimating and bidding the job since the original chart from which the two exhibits were derived was not in existence until : : : the end of the project. Also, as the contractor’s project manager admits, the sequence shown on the critical path charts was not followed in performing the contract work.10

The CPM schedule must accurately represent the actual events on the project for it to form the basis of an FSA: “Accurate, informed assessments of the effect of delays upon critical path activities are possible only if up-to-date CPM schedules are faithfully maintained throughout the course of construction.”11 This court admonition provides guidance as to some of the most common and successful methods of defensive attack against CPM-based delay claims: 12 1. The CPM schedule was not used either in the preparation of the bid or in the management of the project. Failure to use the CPM schedule in executing the work pursuant to contract requirements may give rise to a claim for breach of express or implied warranties. However, the fact that the CPM schedule was not used or implemented will not prevent the claimant from using a CPM analysis to compare the originally approved schedule with accurate as-built data to support a breach of contract, delay, or disruption claim. The CPM utilized in the FSA was prepared specifically for use in the presentation of the claim before the trier of fact and had no real relevance to the actual scheduling employed. 2. The contractor’s expert witness could only testify that the presentation “appeared logical” and “looked right,” because he had not made a detailed analysis of all relevant job records or other documentation, nor had he made a site inspection before or after the project was complete. It is absolutely necessary to have a fully competent expert witness who will not only review all of the relevant records and make a detailed and independent analysis but who also can make a convincing presentation at trial. 3. The contractor offered no evidence to support his claim that the key activity was critical to job progress or on the critical path. The point here is that a detailed FSA must not only be logical within the context of the CPM but also be believable. For example, even if the FSA shows the flagpole to have been critical at the end of the job,

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most triers of fact will simply not believe the flagpole drove the critical path of the project. 4. The original network contained numerous mathematical errors or failed to consider significant events associated with the actual project.

8.4. Development of the Baseline 8.4.1. Essential Elements in Constructing the Schedule While this book does not aim to explain the detail and mechanics of CPM scheduling, a few considerations are worth keeping in mind when constructing the baseline, or “as-planned,” schedule. As discussed previously, the baseline schedule represents the contractor’s original plan for constructing the job and may later serve as a basis for determining the effects of delays. Essential elements of constructing the schedule, in addition to adherence to the contract completion dates and a method to measure progress, include13 • Performing a detailed/comprehensive review of contract drawings and specifications; • Getting subcontractors involved; • Getting “buy-in” from jobsite management personnel (i.e., the people who will actually be doing the work); • Getting “buy-in” from the owner; • Organizing a breakdown of activities so that responsibilities can be clearly defined; • Enlisting the support of a qualified scheduler; • Selecting an appropriate level of detail; • Constructing the baseline schedule in accordance with the milestone dates in the contract documents; • Using the resource loading capabilities of the scheduling software to evaluate the manning of the job (if possible); and • Developing the sequence of work as realistically as possible.

8.4.2. Additional Considerations of CPM Schedule Preparation No single correct way to organize the proper sequence of work on a project exists. As long as a contractor uses sound judgment and

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reasonable assumptions in laying out a schedule, such schedules can be considered reasonable. “CPM schedules are necessarily grounded in pragmatic considerations which govern all activity in the real world of construction. They must therefore be evaluated in light of certain basic principles which affect major construction projects”:14 • A CPM is only as good as the data concerning the underlying labor, equipment, material, and site conditions upon which it is based. A CPM schedule is not a guarantee that the project would be built on time. Contractors have learned through experience that poor CPM schedule practices, including fallacious logic or inaccurate duration estimates, only generate inaccurate CPM schedules. • On most building construction, the work sequence of the various trades is repeated numerous times in different locations throughout the project. Because follow-on trades do not wait for the initial trades to complete their work for the entire building prior to commencing their work, different areas of the project are at different stages of completion at any given moment in time. • On most major construction projects, certain classes of installations require greater care and diligence because of their inherent difficulty or their propensity to take longer than originally estimated. These sequences are not always readily apparent in a CPM schedule. For example, from experience a contractor may know that certain key mechanical and electrical systems present substantial risks of exceeding the planned durations due to the complexity and magnitude of the installations. In addition, the contractor may know that these systems constitute a condition precedent to the work of followon trades in significant portions of the project. In these circumstances, the contractor knows that more attention may be required for these installations than for other work on the critical path. • Timely completion of most projects requires the establishment of flow and momentum. The rhythm of a project and the ability to sequence crews in a logical and nondisruptive manner substantially affect the speed of the installation of various trades. Such a smooth flow is not always clearly identifiable in a CPM schedule.

These examples of pragmatic considerations point out that the contractor must exercise good judgment in interpreting the information in a CPM schedule and a contractor must execute a CPM schedule in light of its construction experience.

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8.5. Float In simple terms, float is the time period between scheduled early finish and late finish of an activity in the CPM schedule. Essentially, it is the time cushion calculated for each individual activity. Activities with zero float are on the critical path—they must be performed within the identified time limits or the overall project will be delayed. While both owners and contractors often assert they are entitled to use the float on an activity or series of activities, U.S. courts generally consider float to be a project resource available to the party that uses it first.15 For example, assume an activity has 15 days of float and the owner orders a 10-day halt of that activity, leaving the contractor on schedule with five days of float left on that activity. Subsequently, the contractor falls behind in his work by 10 days and finishes the contract five days late, but is not granted a contract extension. Why? Because at the time the suspension occurred, the overall contract completion date was not affected. The contractor’s delay consumed the five days of float remaining and then added five days of delay. If the contractor, however, was 10 days late on the item before the suspension occurred (and had only five days float on the item), it would then be entitled to a five-day contract extension. Nonetheless, the topic of float remains controversial because owners often write contractual provisions making it an owner resource.16 While owners continue to include such clauses, they are generally considered poor practice because contractors, who create and execute the work, can arrange their CPM schedules to reduce or eliminate any such advantage an owner might gain.17

8.6. Float—Early Completion A controversial situation on the use of float occurs when the contractor is able to, or intends to, finish early—before the specified contract completion date. Sometimes, the contractor identifies its intention to finish early by submitting its baseline CPM schedule showing early completion. Other times, the contractor wishes to preserve an end-of-project cushion in the form of a specific activity that connects the final work activity with “final” completion.

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In either case, the contractor who proposes a reasonable CPM schedule showing an early completion is planning on taking advantage of the cost savings associated with a shorter performance period. Fixed home office and field office costs can be significant, and a contractor that completes early can reap substantial benefits by finishing early. These two situations generate different issues for courts and are treated differently. In the first situation, courts have found that three conditions must be met to establish the right to damages for owner interference on a project planned to be finished early:18 1. The contractor has communicated to the owner an intention to complete early and must provide the proper documentation. A CPM schedule is sufficient for this task, although simple bar charts for this requirement have also been upheld. Having the owner approve such a schedule is advantageous. 2. The schedule indicating an early finish should be feasible and reasonable and prepared in accordance with industry standards. While courts have yet to provide detailed guidance on what a feasible and reasonable schedule is, expert testimony can usually support this criterion. 3. Owner actions or inactions that interfere with the contractor completing early in accordance with the approved baseline schedule must be demonstrated. This is really two requirements. First, the contractor must prove that it could have completed the original baseline schedule in the time frame depicted. Second, the contractor must prove the owner’s actions were responsible for the failure to finish on time. In the second situation, the contractor has either inserted a specific activity at the end of the project that denotes it is a time contingency, or, alternatively, the cushion of time may appear as an overly long activity such as “clean-up.” In either case, the contractor is indicating it has no intention of actually finishing early, so the previously discussed early completion scenario is inapplicable. If a contractor submits a schedule indicating its intention to complete early, some owners will refuse to accept such a schedule and insist that the contractor use all of the contractually available time. Other owners sometimes accept such schedules but immediately issue no-cost change orders modifying the contractual completion date so as to match the contractor’s early completion schedule.

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8.7. Concurrent Delay Concurrent delay is an important issue in nearly all construction delay cases.19 The stakes are high because when two delays can be considered concurrent, then the contractor is not entitled to delay damages and the owner is not entitled to liquidated damages, although a noncompensable time extension is usually granted.20 Note that some contracts do not allow concurrent delays; they convert concurrent delays into contractor delays. These contract provisions have yet to be tested significantly in courts. The following is a modern definition of concurrency: Concurrent Delay is the occurrence of two or more delay events at the same time—one an owner risk event, the other a contractor risk event—the effects of which are felt at the same time. The term “concurrent delay” is often used to describe the situation where two or more delay events arise at different times, so long as the effects of them are felt at the same time. This is generally referred to as offsetting concurrent delays.21

Concurrency is a legal theory dating from the early 1900s (although it was not called concurrency then). Yet, most contemporary concurrency law we rely upon in the United States was developed in the 1960s through the 1980s. During this period, judicial decisions reflected a careful dissection of the then available CPM schedules that unfortunately generally made detailed allocation of responsibility impossible to determine, hence more findings of concurrent delay.22 Yet, concurrency, as a legal theory, much less a technical issue, is poorly understood and inconsistently applied by courts and experts. 23 Concurrency operates in this manner because historically the courts could not untangle the complicated facts causing the delay. Modern concurrency theory has four conditions that must be met from a technical perspective:24 1. Two or more delays that are unrelated and independent and would have delayed the project even if the other delay did not exist, 2. Two or more delays that are the contractual responsibility of different parties and/or are excusable delays as defined by the contract, 3. The delay must be involuntary, and 4. The delayed work must be substantial and not easily curable.

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The first of these requirements is often the most difficult—both delays must be on the as-built critical path. In other words, even in the absence of one of the two concurrent delays, the project would have finished late. However, a significant technical consideration beyond these requirements concerns the time periods during which the concurrency is evaluated. Two different theories regarding the exact timing of the two or more delays that are candidates for concurrency are the literal theory and the functional theory.25 Under the literal theory, the delays must be literally concurrent in time, as in “happening at the same time.” By contrast, under the functional theory, the delays must occur within the same analysis period. Literal concurrency views the delayed activities in the context of day-today performance. Under this theory, if the first delay started on day one and the second delay started on day two, they would not be concurrent —the delay associated with the first event would create float in the entire project so the second delay could not also be critical. Functional concurrency holds that if the two delays occur within the same measurement period (usually a month), they can be concurrent. For example, analyses that are based upon monthly update submissions will manifest delay only at the end of the month. Therefore, an owner-caused delay occurring in the first week of the update period may appear concurrent with a contractor-caused delay occurring in the last week of the update period. Despite the lag time between them, these delay events could nonetheless be concurrent as long as the other tests are met. Accordingly, the functional application of concurrent delay theory does not necessarily require the delay events to occur on the same days. This type of functional concurrency is closely attuned to delay methodologies that use modeled CPM schedules as their basis and utilize some form of time period analysis (see Section 8.9). The difference in outcome between the literal and functional theory is significant. Given the same CPM schedule, the literal theory analysis will find less concurrency—many more compensable delays for both parties. The functional theory analysis will find many of those delays to be concurrent and, hence, excusable but, depending on the terms of the contract, noncompensable for both parties. The second requirement for concurrency is that the delays be the contractual responsibility of different parties. The application of concurrent delay theory is relevant only when the delays are the responsibility of different parties or one of the delays is a force majeure event. Some contracts contain language assigning responsibility or contractual risk for

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certain types of events such as differing site conditions and force majeure events. If one of the delay events is contractually assigned to neither or both parties, such as a force majeure event, the effective result is the same as concurrency; it is excusable and noncompensable for either party. The third requirement for concurrency, that the delay must be involuntary, is common sense. If the delay is performed voluntarily, it is generally considered pacing. If the delay could have been easily cured but was not, the delay would be considered voluntary. The final requirement for concurrency is also based on common sense. If one of the delays is associated with a minor element of work that could easily be performed, that work should not create a concurrent delay. This element is closely allied with the involuntary nature of truly concurrent delays cited previously.

8.8. Three Types of Acceleration The three types of acceleration are voluntary, directed, and constructive. Voluntary acceleration is by far the most common and occurs on most projects. Voluntary acceleration may occur because a contractor decides to recover time associated with previous delays it is responsible for. Voluntary acceleration may also occur because the contractor decides to advance the work for some activities because of some perceived future impact such as better price, available resources, or identification of future opportunity. This acceleration happens so commonly that contractors seldom consider them accelerations, and owners often are never aware they occur. The contractor absorbs the increased costs of voluntary acceleration either as part of the initial bid contingency or as a reduction in profit. Directed acceleration refers to actions the contractor takes at the owner’s behest to complete the work earlier than planned or required by the schedule to maintain a completion date despite an acknowledged delay. The owner may give the contractor a directive to speed up work and shorten the time of performance, or to overcome owner-caused delays already experienced (i.e., to “buy back” delay time). Typically, such a directive is issued in the form of a variation or change order. As long as the contractor is not mitigating its own delays, the net increase in the contractor’s costs incurred by complying with this directive (e.g., added equipment or labor, overtime pay, etc.) is usually recoverable by the contractor.

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Constructive acceleration is the unplanned shortening of the time of performance for the project. To recover on a claim of constructive acceleration, the contractor must generally show that • A delay occurred for which a time extension should have been granted; • A notice of delay and time extension request was properly submitted; • No time extension was granted, or part of the time extension owed under the contract was denied; • The contractor was required or directed to complete “on time” or threatened with the imposition of late completion damages; • The contractor filed a separate notice of constructive acceleration; and • The contractor actually accelerated its operation and incurred additional costs as a result of the acceleration.

The contractor should be careful to show on its CPM schedule where activities and logic changes were made for constructive acceleration as opposed to those that are for its own acceleration purposes.

8.9. Schedule Analysis Techniques for Claims Support Several basic methods of CPM-based forensic schedule analysis are commonly used to analyze delays. The exact number of delay methodologies depends on how closely the observer wishes to look. At one extreme, every delay analysis performed is arguably a different methodology because each FSA technique must be adapted to the particular facts. Commentators have identified more than 3026, 1427, 928, 729, 430, and many in between. The most comprehensive discussion of FSA methodologies is AACE International’s31 Recommended Practice, Forensic Schedule Analysis 29R-03 (2011)32. This document, prepared through a peer-review process by a group of experts, identifies nine distinct methodologies and numerous modifications or enhancements that are included within the nine. AACE 29R-03 includes technical discussion on virtually all issues

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associated with FSA and has an extensive discussion of 11 issues associated with how best to choose a delay methodology: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Contractual requirements, Purpose of analysis, Source data availability and reliability, Size of the dispute, Complexity of the dispute, Budget for forensic schedule analysis, Time allowed for forensic schedule analysis, Expertise of the forensic schedule analyst and resources available, Forum for resolution and audience, Legal or procedural requirements, and Custom and usage of methods on the project or the case.

However finely various methodologies are described, four primary families of methodologies exist, as discussed in the following sections.33 The different methodologies, if performed properly and without bias— admittedly a near-impossible task—yield nearly identical results, except for the timing of the delays.34 That difference in timing results from when each methodology first recognizes a potential delay. For example, the asplanned vs. as-built methodology generally identifies a delay at the earliest possible moment it actually occurs because the analysis is performed moving from the earliest in time to the latest in time. Conversely, the collapsed as-built methodology usually identifies the delay the latest because its first point of analysis is at the end of the project and moves toward the beginning. Factors such as whether or not the model relies on active CPM calculations, whether the model adds or subtracts fragmentary networks (“fragnets”) to simulate the effects of delays, or whether the analysis is performed globally or in periodic steps further distinguish the four families.35 Because construction projects never unfold exactly as originally planned, one common feature of many variations within families addresses the duration of each analysis period. For example, the asplanned vs. as-built methodology can be performed based on a single period, the entire construction period, or smaller time units. The obvious disadvantage of longer time periods is that during the actual performance, the contractor will likely have to reschedule parts of the project to adapt to changing conditions such as change orders, labor productivity, late material deliveries, and inclement weather.

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In breaking down the entire construction time frame into smaller periods, the choice and definition of those periods will depend upon the circumstances. The most common division of measurement periods is the monthly progress update. Occasionally, the start and finish points for periods are selected to correspond with specific delay events that are of interest to the analyst. Although this is potentially valuable, having analysis periods that are wider than the period encompassed by the progress updates is inadvisable. The danger with longer time periods is that the as-built critical path may undergo multiple shifts that would be lost in the analysis of longer time periods.

8.9.1. As-Planned vs. As-Built As-planned vs. as-built (APAB) analyses compare a baseline CPM schedule to the actual as-built conditions. The schedules can be compared globally or can be broken into smaller periods that can increase the granularity and precision of delay determination. Because projects change over time, the practice of a global comparison is likely to give inaccurate results. Longer project durations or greater deviations from the planned sequences result in a greater likelihood of substantial inaccuracies in the forensic analysis. Additional mathematical analyses (such as productivity analysis, earned-value analysis, or measured-mile analysis) help establish the as-built critical path and apportion responsibility for specific periods of delay to specific parties. Such additional analysis can help prevent a global as-planned vs. as-built methodology from becoming a “total time” analysis, which courts have generally rejected.36 Despite its potential drawbacks, this methodology is one of the most commonly used in forensic schedule analysis. Because it can be performed with somewhat less information, it is often used where other methodologies cannot. At the same time, if applied properly using small intervals of time to reflect changes in project planning, it can be a powerful analytical model.

8.9.2. Contemporaneous Period Analysis The contemporaneous period analysis (CPA)37 technique uses the update schedules created during the course of the work to reconstruct the events of the project and thereby demonstrate the critical path through each of the successive updates. As project events such as progress and unforeseen conditions unfold and are reflected in the contemporaneous

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CPM schedule updates, the effects of progress and subsequent CPM schedule revisions will cause gains and losses to each schedule’s predicted completion date. The contemporaneous series of CPM schedule updates will show when the critical path of the project shifts from one set of activities to another. The size of the time frame to be analyzed is variable: month-to-month is common, but making the windows shorter or longer depending on the alleged delay events is possible. The contemporaneous period analysis is known by many names, most commonly “windows.”38 However, because a “windows” analysis simply depicts a delay analysis done on a periodic basis in slices of time, the concept can be applied to nearly any of the fundamental four families of forensic schedule delay analysis. The CPA methodology comes in several forms, and AACE 29R-03 identifies three variations of the methodology reflecting both the underlying objectives of the analysis and the quality of the underlying data.39 Most important of these variations is the bifurcated CPA, sometimes called the two-step method, in which changes in the CPM schedule are analyzed periodically, segregating effects caused by progress (or lack thereof) and by logic sequencing initiated by the contractor.40 By performing the analysis in this manner, the analyst can distinguish between possible delays due to nonlogic issues, such as delayed deliveries, poor weather, or poor productivity, and a contractor’s efforts to revise the logic to reflect those events. Courts and practitioners widely recognize the CPA method because of its use of contemporaneously unaltered or modeled CPM schedules.41

8.9.3. Time Impact Analysis The time impact analysis (TIA) methodology is one of the most common and widely accepted methods of analyzing project delays. A TIA compares two CPM schedules with similar data. One schedule reflects the schedule at the start of an analysis period (such as the beginning of a month or immediately prior to an impact) with an identical CPM schedule except for the inclusion of one or more “fragnets” reflecting an actual or anticipated event not previously included in the CPM schedule. The events, administrative resolution time, and added work necessary to return to original contract work are represented in the affected schedule through the addition of a fragnet consisting of representative activities and logic. The comparison of the predicted completion dates of these two schedules (before and after the fragnet

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insertion) determines whether potential entitlement to a time extension exists.42 Though widely popular, one important consideration of TIAs is the timing of the analysis. If a TIA is conducted before the added work is performed, it is a prospective TIA. Prospective TIAs are an essential tool for the project scheduler to determine the likely impacts of changed conditions on a project and are often included as a requirement in the contract as a prerequisite for granting a time extension.43 In contrast, a retrospective TIA is performed after the added work has been completed and is one of the most used and respected FSA methodologies. Like all FSA methodologies, the retrospective TIA is susceptible to manipulation through selective modeling of events, timing of fragnet insertion, and logic of inserted fragnet.44 However, an effective retrospective TIA can be performed that accurately represents the likely effect of delays and impacts. Retrospective TIAs are widely performed and generally accepted by courts because they are premised on the actual schedule updates and events on the project.45

8.9.4. Collapsed As-Built The collapsed as-built (CAB), also known as the “but-for,” analysis starts with the development of an accurate as-built schedule. Using this asbuilt data schedule, the analyst creates an analysis model CPM schedule by inserting analyst-identified logic connections. The resulting analysis model CPM schedule is intended to mimic, as closely as possible, the CPM logic and durations that would have been used to build the project. In the model, the analyst then eliminates selected delay activities identified as the responsibility of the opposing party and recalculates the schedule to show what would have happened had those events not taken place. The CAB method can be performed either in a single step (deleting all alleged delay activities at once) or in multiple steps (removing one delay event at a time and recalculating after each deletion). A conceptual advantage of the CAB method is that the created analysis model CPM schedule contains both parties’ delays, so if the analyst removes only one party’s delays from the schedule, the other party’s delays remain. Through this mechanism, the CAB naturally considers both parties’ delays and can distinguish between the various parties’ responsibilities. The CAB methodology is one of the more difficult and time-consuming methodologies and is not generally preferred in court or board cases.46

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8.10. Contemporaneous Understanding of Criticality Some courts47 and commentators48 believe that one of the most important aspects of any FSA method is how closely it reflects the decisions and perceptions of the project management staff during the construction of the project. This “contemporaneous understanding of criticality” is considered important because it theoretically sheds light on the actions or inactions of the project management staff during construction. Advocates of methodologies that reflect a contemporaneous understanding of criticality believe that only with a true reflection of the motivations of project participants can a true understanding of criticality be achieved. They perceive any FSA method that does not reflect the contemporaneous understanding of criticality as being akin to “armchair quarterbacks” analyzing a project based on 20-20 hindsight. The contrary position is that only with a clear understanding of all the facts, even those unrecognized, unknown, or unknowable to the contemporaneous project participants, can a true model of the as-built critical path be achieved.49 How the different methodologies reflect the contemporaneous understanding of criticality can depend on both the details of the implementation of the methodology and how the contemporaneous project managers considered the CPM schedule in their management of the work: • The as-planned vs. as-built methodology does not consider contemporaneous understanding of criticality in its simplest form. However, more sophisticated implementations attempt to identify the as-built critical path through a careful examination of the contemporaneous record and make adjustments accordingly. In these situations, identification of the as-built critical path can take into account a contemporaneous understanding of criticality, although this is not essential to the method. • Because the contemporary period analysis methodology is based on the schedules developed by the project participants during the project, it is generally considered the methodology that most closely reflects the contemporaneous understanding of criticality. • Because it uses after-the-fact logic constructions, the time impact analysis methodology is generally assumed to ignore the contemporaneous understanding of criticality. However, if the TIA fragnets are closely modeled on actual events, they arguably do reflect a contemporaneous understanding of criticality.

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• The collapsed as-built methodology is predicated upon the creation of an analysis model CPM schedule after the project is complete; thus this method does not reflect a contemporaneous understanding of criticality.

8.11. Comparison Chart of CPM Analysis Methods In general, for any of these methods to work well, the as-planned schedules (where used) must be reasonable and both as-planned and updated schedules must be free of logic errors, omissions, or inaccurate estimates of activity durations. Making corrections to the as-planned schedule(s) before its (their) use as a baseline may sometimes be necessary. Appropriate logic changes must also be made to the as-built schedules to reflect actual changes in sequence of the work, whether initiated by the contractor or the owner. Figure 8-1 shows a summarylevel comparison of the four primary CPM delay analysis methods.

8.12. Other Methods Other methods sometimes used for schedule analysis are essentially variations of the four previous described methods. Typically, these variations substitute either the original as-planned and/or as-built with an alternative schedule. The alternative schedule may reflect assumptions or considerations not originally included. The substitutions may be intended to show hypothetical situations such as how an activity “should have been” done or “would have been” planned.

8.13. Expert Schedule Analysis Schedule analysis can become extremely tedious for both simple and complex projects, depending on the detail of the CPM network, number of activities, reasonableness of the original as-planned schedule, and accuracy of the as-built schedule. The outcome of disputed claims that end up in litigation often turn on the thorough analysis of reputable

Figure 8-1. Comparison Chart of CPM Delay Analysis Methods.

Forensic Schedule Analysis Methodology Comparison Contemporaneous Delay = Schedule B minus Schedule A FSA Methodology Understanding of Schedule A Schedule B Criticality As-planned vs. In certain Baseline schedule As-built schedule as-built applications Contemporary Subsequent statuses Statuses schedule Yes period analysis schedule Time impact Statuses schedule In certain Statuses schedule analysis with fragnet applications Collapsed as-built Collapsed as-built As-built schedule No schedule

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scheduling experts and the ability of such experts to explain to the trier of fact what was concluded about the project and how those conclusions were reached. The ability for the scheduling expert to perform an analysis is highly dependent upon the availability of project documentation and personnel. Retaining and keeping accessible all project documentation, especially diaries/logs kept by foremen, superintendents, and other project personnel, is absolutely critical.

8.14. Conclusion The contractor should consider the compilation and use of CPM scheduling techniques as a valuable tool and not just a nuisance contract requirement. The as-planned CPM should be constructed realistically and accurately, and the schedule should be updated regularly to reflect actual events, durations, and start and stop times. The schedule clauses should also be read carefully because each contract may demand different scheduling and update requirements from the contractor. Finally, the boards and courts have become sophisticated in understanding CPM scheduling theory and will look for the underlying proof of cause-and-effect relationships before relying on the parties’ schedule analysis presentations.

Endnotes 1. Roberts & Schaefer Co. v. Hardaway Co., 152 F.3rd 1283, 1287 (11th Cir. 1998). 2. Richard H. Clough, Construction Project Management (New York, John Wiley & Sons, Inc., 1972), pp. 7–8. 3. “Documenting the Schedule Basis,” AACE International Recommended Practice No. 38R-06, (2009), p. 3. 4. J. Wickwire and R. Smith, “Use of Critical Path Method on Contract Claims— 2000,” 19 Const. Law. 12, 14-15 (1999). 5. Rotten Bananas, Engineering News Record, McGraw-Hill, New York, May 26, 2003. 6. J. Wickwire, T. Driscoll, T. Hurlbut, and R. Hillman, Construction Scheduling: Preparation, Liability and Claims, § 12.03, at 572 (Aspen 3d ed. 2010). 7. PCL Constr. Services, Inc. v. United States, 47 Fed. Cl. 745, 801 (2000). 8. Sollitt Construction Co. v. United States, 277 F.3d 1346, 1360 (Fed. Cir. 2002). 9. G.M. Shupe, Inc. v. United States, 5 Cl. Ct. 662, 728 (1984).

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10. Chaney & James Co. v. U.S., 190 Ct. Cl. 699 (1970); also see Titan Pacific Construction Corp. v. U.S., 17 Cl. Ct. 630 (1989). 11. Blinderman Constr. Co. v. United States, 39 Fed. Cl. 529, 585 (1997). 12. A. James Waldron, Publisher, The Legal Implications of a Project Schedule, (Haddonfield, N.J., Waldron Enterprises, 1974), pp. Xlll-3 and Xlll-4. 13. F. Wilshusen, E. Berg, T. Brookie, and C. Okizaki, “Construction Checklists,” Checklist #71, ABA Construction Forum (2008), p. 507. 14. J. Wickwire and R. Smith, “The Use of Critical Path Method Techniques in Contract Claims,” Public Contract Law Journal I (October, 1974), pp. 5–7. 15. Titan Pacific Const. Corp., ASBCA No. 24616, 87-1 BCA 19,626, 17 Cl. Ct. 630, 89 F.2d 1227 (Fed. Cir. 1990). 16. S., Hess, “Who Should Own the Float?,” Journal of the College of American Construction Lawyers, Vol. 4, No. 1, Winter 2010. But see T. Trauner, W. Manginelli, and B. Furniss, “Why Owners and Contractors Should Share the Float,” Journal of the College of American Construction Lawyers, Vol. 5, No. 2, Summer 2011. 17. J. Livengood and P. Kelly, “The Law of Schedules,” Transactions 2012, AACE International Morgantown, WV. 18. Interstate General Government Contractors v. West, 12 F.3d 1053, 1058 (fed. Cir. 1993). But see Weaver-Bailey Contractors, Inc. v. U.S., 19 CI. Ct. 474 (1990) (where the court ruled the contractor was entitled to delay damages for its inability to finish early, even though the original baseline CPM schedule did not show any intention to finish early). 19. P. Kutin and A. Ness, “Concurrent Delay: The Challenge to Unravel Competing Causes of Delay,” (October 1997), 17 Constr. Law 18. 20. Essex Electro Engineers, Inc. v. Danzig, 224 F.3rd 1283, (Fed. Cir. 2000). 21. J. Livengood, “Offsetting Delays—The Owner Friend,” Cost Engineering Journal, January 2012. 22. J. Bidgood, S. Reed, and J. Taylor, “Cutting the Knot on Concurrent Delay,” Construction Briefings, (February 2008). 23. C. Brasco, and C. Anzidei, “Concurrent Delay and the Critical Path: Views from the Bench,” Cost Engineering Journal, February 2010; J. Livengood, “Comparison of English and U.S. Law on Concurrent Delay,” The Construction Lawyer, Summer 2015. 24. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. Subsection 4.2 25. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. Subsection 4.2 26. A recent count of all these separately named methodologies contained in AACE 29R-03, which admittedly contains many names for the same methodology. See AACE International Recommended Practice 29R-03 (2011) Forensic Schedule Analysis, AACE International, Morgantown, WV. 27. R. D’Onofrio and A. Meagher, “What Is a Schedule Good For? A Study of Issues Posed by Schedules on Complex Projects,” Constr. Law., Winter 2013, p. 6. 28. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. Subsection 4.2 Section 3.

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29. J. Fletcher and L. Stipanowich, “Successful Forensic Schedule Analysis,” 1:1 J ACCL 226-234 (Winter 2007). 30. Society of Construction Law, “Delay and Disruption Protocol,” October 2002, Society of Construction Law, London; P. Kelly and W. Franczek, “Clearing the Smoke: Forensic Schedule Analysis Method Selection for Construction Attorneys,” The Construction Lawyer, Fall 2013, p. 30. 31. Formerly known as the Association for the Advancement of Cost Engineering International Inc. 32. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. 33. P. Kelly and W. Franczek, “Clearing the Smoke: Forensic Schedule Analysis Method Selection for Construction Attorneys,” The Construction Lawyer, Fall 2013, p. 30. 34. J. Livengood and P. Kelly, “Forensic Schedule Analysis Methods: Reconciliation of Different Results,” Cost Engineering, Jan/Feb 2015, p. 13, AACE International Morgantown WV. 35. T. Trauner, W. Maginelli, S. Lowe, M. Nagata, M., and B. Furniss, Construction Delays, (2009, 2ed.), Elsevier Inc., London, p. 31. 36. Santa Fe Engineers, Inc. ASBCA Nos. 24,578, 25,838, 28,287, 94-2 BCA 26,872, (1994). 37. L. Schumacher, “Quantifying Delays on Construction Projects,” Seattle Daily J. of Commerce, Dec. 24, 1991, and L. Schumacher, “Apportioning Delay on Construction Projects,” Seattle Daily J. of Commerce, Dec. 25–26, 1991. 38. K. Nielsen, P. Galloway, and M. Ramey, “CPM Scheduling Delay: Window Analysis, Concurrency, and Proof,” Construction Disputes—Analysis and Management. Winnipeg, Canada. (November 1–5, 1993). 39. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. Subsections 3.3, 3.4, and 3.5. 40. Hoshino, K., Livengood, J., and Carson, C., RP 29R-03 Forensic Schedule Analysis, AACE International, (2011) Morgantown, WV. Subsection 3.4. 41. J. Ciccarelli, and M. Cohen, “CDR.05 Window Analysis: The Method and the Myth,” AACE Transactions (2005). 42. One variation of the TIA, called the impacted as planned (IAP), deserves special discussion. This methodology, which inserts a single fragnet representing an impact into a CPM schedule, is widely regarded as an invalid FSA method except in very limited circumstances. The problem with the methodology, which remains one of the most commonly used because of its extreme simplicity, is that it considers only a very small segment of the events on the project. Courts and commentators have therefore generally rejected its use. J. Wickwire, T. Driscoll, T. Hurlbut, and R. Hillman, Construction Scheduling: Preparation, Liability and Claims, § 9.06 [D], at 330 (Aspen 3d ed. 2010). 43. Unified Facilities Guide Specification (USFG), Section 1.8.1 (2008). This is the model specification for USACE, NAVFAC, AFCESA, and NASA. 44. J. Livengood, “CDR-08: Retrospective TIAs: Time to Put Them to Rest,” AACE Transactions (2008), AACE International, Morgantown, WV. 45. P. Bruner and J. O’Connor, Bruner & O’Connor Construction Law, Vol. 2, Section 15:123, West Thompson Reuters, New York. (2007), p. 328.

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46. J. Wickwire, T. Driscoll, T. Hurlbut, and M. Groff, Construction Scheduling: Preparation, Liability and Claims, § 9.06 [B], at 328 (Aspen 3d ed. 2010). 47. Fortec Constructors v. U.S., 8 Cl. Ct. 490 1985, aff’d 804 F2d141 (Fed. Cir. 1986). 48. J. Wickwire, T. Driscoll, T. Hurlbut, and M. Groff, Construction Scheduling: Preparation, Liability and Claims, § 9.05, at 323 (Aspen 3d ed. 2010); P. Kelly, “Contemporaneous understanding of criticality,” AACE Transactions 2016, AACE International, Morgantown, WV. 49. AACE 29R-03 does not contain any discussion of “contemporaneous understanding of criticality” by that name but does contain an extensive discussion of “hindsight,” where the analyst performs the analysis with a detailed recognition of events that occur later in time, and “blindsight,” where the analyst pretends ignorance of future events. AACE 29R-03, 4.2.D.6, p. 108.

Chapter 9

Impact on Labor Productivity from Claims and Change Orders William Ibbsa and Paul L. Stynchcombb

Quantification of loss of [productivity] or impact claims is a particularly vexing and complex problem.1 One of the ironic things about loss of productivity claims is that often the very factors that produce the loss of productivity can also serve to preclude the accurate and precise recordkeeping that would constitute evidentiary certitude : : : .2

9.1. Introduction3 Loss of productivity (LOP) claims are indeed vexing and ironic partly because contractors cannot easily and affordably collect sufficiently detailed data that would allow them to price the claim using actual cost data. In projects with substantial change, the cost-control system would have to be unusually detailed, and the cost accounts that it is built upon would have to be amended and redefined quickly to capture the laborhours being expended as changed work is executed in the field. Each new change could necessitate a new cost account, and the field people recording the labor-hours would have to be informed of the new coding a

Professor, Construction Management Program, Department of Civil Engineering, University of California, Berkeley; and President, The Ibbs Consulting Group, Inc. b Consultant, The Ibbs Consulting Group, Inc. 201

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protocol promptly. In addition, the data collection process would have to ensure that no cost impacts are omitted from capture. Additionally, when change work is interspersed with base contract work in the same area or on the same system(s) and within the same time frame, differentiating between when base contract hours stop and when change order hours commence can be difficult, if not virtually impossible. Loss of productivity claims are also difficult to address because to measure a loss requires the existence of some baseline. That baseline is usually the original estimate (sometimes an adjusted estimate) used in the contractor’s bid, which was predicated on job conditions that have, by definition, changed. The difference between actual realized productivity and planned productivity is an estimate with some measure of subjectivity and thus open to criticism. This may mean that the best time to measure lost productivity is when the project has concluded and actual data are available. While owners may frown upon end-of-project claims, comprehensively estimating total productivity loss while the project is incomplete is frequently impossible. The contractor may use various industry studies to forward estimate losses in labor productivity. However, with certain types of productivity impacts (e.g., cumulative impact claims), if the contractor must submit estimates of labor productivity impacts during the impacting events, a reservation of rights should clearly be included with the estimate citing its incomplete nature. There are instances where reservation of rights may be implied if they are not clearly reserved (e.g., assertions of productivity impacts in the weekly job minutes), but a court’s acceptance of such may hinge on the contemporaneous conduct of the parties with regard to reservations and waiver of rights. Further compounding the problem is the fact that labor is frequently the largest and most variable type of cost on any construction project, meaning the value of any productivity dispute can be substantial. These factors and others make productivity a crucial part of any construction project and loss of productivity an important topic. This chapter describes and discusses that topic, starting by defining productivity and its importance to any project. Although the productivity of planning and design functions is important, we concentrate on construction (i.e., field labor) productivity because that is the source of so many cost and schedule problems. Field labor productivity impacts are also more commonplace and generally more expensive than planning and design productivity disputes. Because they are normally the underlying reason for a loss of productivity claim or change request, we will

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also review the subject of changes and change orders. This exploration will include the elements of causation, liability, and damages, all of which are necessary for a change to be declared reimbursable and transformed into a change order. Lastly, various methods for quantifying loss of productivity (the damage element) will be described and discussed in detail—both on an individualized and cumulative basis.

9.2. Productivity’s Nature and Importance Labor productivity is the critical cost component for most construction projects. Project costs are made up of labor, materials, equipment, subcontractor, and overhead costs. From a contractor’s viewpoint, the labor costs are usually the largest or one of the largest categories of such costs and the most uncertain at bid time. In turn, three variables drive labor costs: (1) quantities of work to be performed (for example LF, linear feet), (2) hourly labor cost, and (3) productivity:

ðQuantity of workÞ × ðCost∕Labor-hourÞ Productivity ð1,000 LF of 4 in: pipeÞ × ð$100∕Labor-hourÞ = 25 LF∕Labor-hour

Labor costs =

= $4,000 The productivity rate in this example is the most unpredictable of the three variables. Detailed review of the project plans and specifications can generally yield reasonably accurate measurements of the work quantity, and labor agreements provide the hourly cost. However, many different events and variables can affect productivity, some of which are beyond the control of the contractor. Because of this uncertainty and because labor costs are such a large proportion of total project costs, labor productivity is regularly the greatest risk factor and source of cost and schedule uncertainty for owners and contractors alike. As this small example shows, productivity is a measure of work output per unit of resource input; e.g., 25 LF of pipe installed per laborhour.4 It differs from production, which would be 25 LF of pipe. Though

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most references to productivity and productivity loss refer to construction work, designer productivity is also an important concept. Designer productivity is more difficult to measure, though, because the work product (e.g., a study or a design) is not as tangible as a construction work product.

9.3. Change and Productivity Loss Loss of productivity is some level of achieved actual productivity that is less than the productivity level planned. The term “productivity factor” or “productivity index” is a mathematical expression of such loss:

Productivity factor, PF =

Actual productivity Planned productivity

If the planned productivity were 25 LF per labor-hour and the actual productivity were 20 LF per labor-hour, then PF = 0.80, indicating a 20% loss of productivity. Direct labor costs of the project may then increase and slow project progress, elongating the schedule and increasing overhead costs.5 Total project cost may subsequently increase, thus reducing or eliminating the contractor’s profitability and impairing the owner’s return on investment or project utility. The result of productivity loss is reduced profit (or outright loss) for the contractor and possibly a delayed and more costly project for the owner. Therefore, an important and sometimes challenging aspect of construction cost control is measuring and tracking labor-hours and production in sufficient detail to allow analysis of the data. Without this level of data, determining the true root cause(s) of poor labor productivity and taking early remedial action to forestall further deterioration or even to improve productivity, will be highly problematic.

9.3.1. A Word about the Effects of “Changes” on Productivity If an estimator or planner has accurately anticipated how the project will be executed, the actual productivity rate will equal the planned productivity rate. When the actual conditions adversely differ from the planned conditions, loss of productivity probably occurs. We define such variations in a project plan as “change,” which is any addition, deletion, or

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revision to the planned work scope (Ibbs et al. 1994). Under most construction contracts, the contractor is responsible for demonstrating that change has resulted in schedule impact and/or a loss of labor productivity. Usually, changes result in a suspension or slowdown in the work that disrupts the rhythm of craftworkers. When such interruption occurs, the contractor’s crews may incur idle time while they move to another worksite or wait for the interruption to be resolved. And they may lose rhythm and then spend time working their way back up the learning curve. This type of impact is often known as “disruption.” A change may or may not cause an adjustment to the contract price or contract time. It may be physical or nonphysical in nature (such as alterations in the administrative or commercial conditions of a project). It may be an addition or deletion to the scope of work, and indirect and direct impacts to the project may occur. Projects are rarely finished without some change, but contractors may anticipate and absorb certain small amount of change without dispute (Ibbs 1994). Note that a change does not necessarily have to be converted into a change order. A change order, or contract modification, is executed only when the change results in a modification to the contract; i.e., the change has affected the underlying bargain between the owner and contractor. This is where the issue of liability enters the discussion. If the change is the responsibility of the contractor, such as a mistake locating and erecting a cast-in-place concrete column, then no change order would be forthcoming. Most contractors prefer to finish a project without change and change orders because they believe change orders are ultimately less profitable than the base contract work, especially considering the administrative issues involved and the potential “hidden costs” of disruption. One reason for this is that while the direct costs of a change can be apparent at the time, some indirect or distant costs may be less clear. Productivity losses associated with changes that are not fully foreseeable and ripple through the project to all aspects of the work are one example of such distant costs.

9.3.2. Change Types Different types of change exist. To determine causation and liability for a change, and thus who will pay for a particular change, it is useful to categorize it. This allows a more focused review and discussion of the

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change. Lee (2007) offers such a categorization, described in the following sections. Project and Contract Factors These are matters related to the physical and management aspects. • • • • • • • • •

Project size, scope, duration, and budget; Complexity; Project type (hospital, warehouse, commercial, residential); Regulations and building codes; Multiple contracts; Project delivery system; Contract type and risk and liability provisions; Construction means and methods; and Special requirements.

Location and Environmental Factors Location is always important to consider when understanding the project and any purported changes. • Geological site conditions; • Transportation network (commuting considerations, logistical support, traffic, and site access); • Weather patterns (temperature, humidity, and season variability); • Local labor climate; and • Local communities and cities (size, attitude, and economy).

Project Team Factors The capability, capacity, and experience of the people managing the project—whether in the owner’s, designer’s, or contractor’s organization— is vitally important. • Contractor and subcontractor business systems and practices; • Project manager (experience, familiarity with project type, time spent on project); • Owner, architect/engineer, construction manager systems and practices (experience, familiarity with project type, communication,

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timely decision making, procedures, and systems for responses); and • Third parties, the public, labor organizations, regulators, adjacent parties. Managerial Actions and Decision Factors When changes happen, management actions must consider certain decision factors. Proper actions can minimize the impact, but sometimes the only option available will decrease productivity. Some actions can themselves cause other events to occur, generating further delays. These factors include: • Contractor decisions and responses: ○ Accelerate the work; ○ Change work sequence; ○ Increase support work and services (supply of tools, equipment materials, information and directives, proper working conditions, and site management); ○ Change the ratios of crews and supervisors; ○ Alter coordination between trades, subcontractors, and shifts; ○ Modify management of suppliers; ○ Add more workers; and ○ Work overtime and shift work; • Owner decision and responses: ○ Failure to coordinate the design prior to fabrication and field erection; ○ Change orders; ○ Acceleration orders; ○ Processing of change orders, reviews, and approvals; ○ Timeliness in responding to requests for information (RFIs), timely and proper engineering support; ○ Differing site conditions; and ○ Directed overtime or shift work; • Disruptive events that are symptoms on the site when a job is experiencing disruptions: ○ Congestion/trade stacking; ○ Shortage in skilled labor; ○ Increased accidents, injuries, absenteeism, and turnover rates; ○ Errors, mistakes, and poor quality work;

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○ ○ ○ ○ ○

Slower pace, increased breaks, waiting, and delays; Stop and go operations or out-of-sequence work; Lost learning curve effect; Bad weather and seasonal effects; and Rework.

Human Reaction Factors Human reaction factors address the ways in which laborers react in different disruptive situations: • • • • • • • • •

Fatigue; Physical reactions to weather or work conditions; Day or night work; Disturbed biological clock and sleep deprivation; Clumsiness and adeptness; Morale, motivation, and negative attitudes; Loss of the job rhythm; Social and domestic issues; and Work without clear direction.

External Factors There are also factors that are beyond the immediate control of the project participants. We label those external factors: • • • •

Force majeure; Strikes, riots, and wars; Changes in national and global economy; and Political forces and international influences.

Each of these categories has a different productivity effect, some of which are direct while others are more indirect. Some affect the project immediately, and others take longer to have a measurable impact. Many are not exclusive to one category, and each factor will have different effects, depending on the characteristics of the project. For example, generally speaking, cold weather affects work that requires fine motor skills more than it affects manual labor, but the effect is amplified if the worker is fatigued from extensive amounts of overtime or if the work is at night.

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Other important change characterizations include directed versus constructive acceleration, in-scope versus out-of-scope versus cardinal change, beneficial versus detrimental changes, scope versus design development changes, and required versus elective changes. The changes may be owner directed or third-party mandated. The issue of foreseeability, which has become very important in recent years, will be discussed later.

9.3.3. Factors That Magnify the Impact of a Change—First and Second Order Losses One of the difficulties of accurately ascertaining loss of productivity is that the initiating event may not fully anticipate the productivity loss and associated costs. Ripple effects may result in further downstream disruptions and consequences. For instance, a change resulting in idled labor may delay a project, causing an immediate or first-order loss of productivity. If a time extension is not granted to accommodate that delay, the contractor may need to require labor to work overtime to avoid exceeding the contract completion date and incurring liquidated damages. That overtime in turn may result in further loss of productivity (a second-order loss) because fatigued workers are less efficient. Other factors can lead to a ripple-compounding effect and thus magnify the impact, including • • • • • • •

Timing of the change, Complexity of the added work, Time required to approve a change, Interdependencies among activities, Intensity of the work and amount of room in the schedule, Management practices, and Lack of or faulty inspection and supervision by the architects and engineers.

This dynamic, complete with a compounding feedback loop, has been described by Ibbs and Vaughn (2013) and Lee (2007) as an actionresponse model; see Figure 9-1. Estimating the full impact of a change on labor productivity should start with a categorization of the change itself (causation and liability) and include a broad view of the change’s context. This allows quantification of the change and its impact (damages). Demonstrating the fundamental reason for the difference between the planned and actual

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Figure 9-1. Action-Response Model.

productivity is called “causation,” which is one of the three elements necessary for one party to a contract to pursue additional compensation from the other party. The other two elements are liability and quantum.6 The next section discusses these three elements.

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9.4. Loss of Productivity Change Requests and Claims Contractors and owners who want to properly address changes must understand both the legal and construction management aspects of change.

9.4.1. Causation, Liability, and Quantum For a loss of productivity claim to receive favorable consideration, three elements must be demonstrated: causation and liability (collectively called entitlement) and resultant injury.7 Liability includes (1) a legal right to recover based on either a remedy-granting provision in the contract or the owner’s breach of the contract and (2) evidence that the owner and/or its agents (i.e., designer, construction manager) did something to hinder the contractor’s performance. Examples include failing to grant a deserved contract time extension or ordering a large number of design changes that added a measurable amount of labor to the project. The causation element requires the contractor to identify and prove, to the extent reasonably possible, what caused the loss of productivity. This causation element is often the most difficult to prove and can be thought of as the triggering event that results in some effect, such as loss of productivity (Jones 2003). As one authority has written, it is “an elusive commodity.”8 The sheer number of changes will itself not be persuasive to most triers-of-fact.9 Numerous loss of productivity claims have failed because causation was not sufficiently demonstrated.10 Once the triggering event is identified, the issue of liability must be addressed; namely who, by either contract or industry custom and practice, is responsible for the change. Note that a change request or claim for productivity loss (often called a disruption claim) differs from a delay claim in that the disrupted work does not need to be on the project’s critical path. That is, the contractor need not prove that contract performance was extended beyond the planned completion date to recover loss of productivity damages.11 In the eyes of the law, it can be a separate cause of action. Once the contractor passes the hurdle of entitlement (which includes meeting notice provisions), it can demonstrate damages. The contractor’s claim is enhanced with contemporaneously created project

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documentation, such as accurate labor-performance reports, daily field reports, photographs, and testimony from credible people involved in the project or experts.

9.4.2. Quantification of Damages The ideal method for computing loss of productivity damages is through the “particularized” actual cost method, where the full set of damages associated with a change is evaluated on a case-by-case basis. This is not always possible, especially on projects with multiple, intertwined changes.12 Consequently, estimate-based methodologies are commonly used to estimate damages, preferably supplemented by expert opinion (Jones 2001). The preferred order of such methods is (1) project-specific studies, (2) specialty industry studies, (3) general industry studies, and (4) costbased methods (AACE 2004). Project-Specific Studies One type of damage calculation methodology depends on data that comes entirely from the disrupted project itself. The Measured Mile Project-specific studies involve study of the actual disrupted project. Preeminent among these methods is the “measured mile” approach, which compares the productivity of an impacted portion of the project against that of an unimpacted portion for the same type of work (Zink 1986). Other variables and costs that are not associated with the disruptive event(s) or are not the owner’s liability must be excluded from the calculation. The method has the virtue of not relying on the original cost estimate, which may be flawed, and it can be applied in a prospective manner if the disruption is recognized as the work progresses. It has been widely accepted at the federal and state levels.13 Recognizing that areas or time frames containing 100% untainted work that is identical to the disrupted work will usually be impossible to identify, the courts have allowed comparisons of reasonably similar, rather than identical, work.14 The measured mile analysis must be applied with care and consideration of the project facts. First, a biased analysis can lead to the assertion that the difference between actual costs expended and the

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measured mile prediction is all claimable, whereas some of the loss may actually be contractor self-inflicted. Second, the project may not have an unimpacted section—it may have been disrupted from day one to completion. In such cases, the least-impacted (or even less-impacted) section can be used as the reference portion (Thomas 2010). This method has the disadvantage of possibly being overly conservative and ceding some damage to the owner if the least-impacted disruption is owner-caused. Also, a potential problem with measured mile analysis is that as typically applied, it only compares averages. Recent work has shown that considering the variability of the productivity, which can be measured by the statistical standard deviation, is also important (Ibbs and Liu 2005). The measured mile approach often requires an expert to extract and collate labor and material data from sources such as payroll reports, purchase orders, photographs, and other contemporaneous data. In the final analysis, the claimant and/or its expert must arrive at a ratio of labor-hours expended to install a known quantity of material or equipment to perfect a measured mile analysis. In addition to the difficulties of obtaining reliable and usable labor records by which a measured mile analysis can be performed, on some projects no time period or area represents non- or less-impacted segments of the work as mentioned previously. Thus, the measured mile is offered as the basis of claim on relatively few construction projects. Guidelines for Developing a Measured-Mile Analysis A set of principles for developing and applying the measured mile was developed by (Ibbs 2012b). It was based on a detailed review of case law, board decisions, academic research, and authoritative industry studies.15 The following lists those guidelines, with the key, specific references used to develop the guideline cited in parentheses: 1. Selection of the measured mile analyst a. Use impartial, experienced, knowledgeable experts. (Luria Brothers, Daewoo, J.A. Jones, Calvey & Zollinger) b. Consult someone who understands both construction cost accounting and construction work methods. (J.A. Jones) c. Review the entire project record. Interview the project personnel, including field personnel. Review pertinent documentation,

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and obtain clear understanding of the issues in dispute. (Batteast, J.A. Jones, Keane) 2. Selection of the impacted period a. Graphically plot daily, weekly, and monthly productivity over time to identify periods of disruption. (Zink, Finke 1998, Thomas 2000, Ibbs 2005) b. Consider use of statistical methods to select impacted and unimpacted periods objectively. (Finke 1998, Ibbs 2005, Ibbs 2010) c. Compute productivity, not production data. (Zink, Ibbs 2005, Thomas 2010) d. At a minimum, make an effort to demonstrate cause and effect between the change(s) and the consequence(s). (J.A. Jones). e. Ideally, prove what the causes of LOP were. If unable to prove, demonstrate and explain to a reasonable degree. f. Investigate the timing of the purported disruptions and their alleged consequences. g. Make adjustments for noncompensable changes and contractorcaused problems in the impacted period. (J.A. Jones) h. Consider developing different measured mile categories of “impact severity” rather than one general category. (Clark Concrete) 3. Selection of the measured mile period a. Select a reference period for a narrow spectrum of similar work i. Select a period as similar to the disrupted period as available. (Zink, AACE, Loulakis 1999, Presnell, Serag, Ibbs 2005, Ibbs 2010, Thomas 2010, Ernst) ii. Use quantity of work per labor-hour as a measure of productivity if possible; if not, resort to quantity of work per percent project complete or quantity of work per dollar spent. (Bell BCI, P.J. Dick, P.W. Construction, James Corp., AACE) iii. Consider the physical character and amount of the work. (Zink, AACE, E.C. Ernst) iv. Consider the means and methods, weather conditions, work hours, project schedule, site logistics, management and supervision, trades, etc., used to perform the work. (Zink, AACE, Thomas 2010, Bay Construction) v. Consider the administrative and managerial aspects governing the work, e.g., supervisory ratios, number of and time

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spent processing shop drawings, RFIs, and change orders. (AACE, Ibbs 1997) vi. Select workers with reasonably similar skill, knowledge, and effort. The same labor pool is desirable. (P.J. Dick, Loulakis 1999) vii. Separate the loss of productivity by labor trade if possible. (Bay West) viii. Use owner-collected data if available. (Dieterle) b. Confirm that the reference period has “unhindered” productivity, both for the contractor and any subcontractors or suppliers i. Make adjustments if contractor-caused hindrances are present to adjust the reference period. (Lamb Engineering, Luria Brothers, Southern Comfort) ii. Prepare to explain those adjustments with solid reasoning, not just assertions. (Luria Brothers) iii. Conversion factors, perhaps derived from authoritative estimating sources, may be needed to compensate for differences between unimpacted and impacted work. (Thomas and Oloufa) c. If no measured mile productivity data are available on disputed project, use other information sources, such as i. Published industry estimating guides. (AACE) ii. Other projects built by this contractor or by similar contractors. (Robert McMullan & Sons, Maryland Sanitary, Southern Comfort, Shea, J.A. Jones) iii. Dollar per percent complete, earned value rates. (Bell BCI, James Corp., AACE) iv. Baseline productivity analysis. (Thomas 2010) v. Make adjustments as necessary to baseline reference period to develop true unimpacted baseline productivity rate. (Bay West, Luria Brothers) 4. Calculate the loss of productivity a. Test the integrity of the underlying productivity, change, progress, etc. data. (Dieterle) b. Apply LOP factors to just the time period and labor trade disrupted. (AACE) c. Adjust for learning curve productivity factors in the early stages of a project. (Bay West, AACE) d. Adjust for additional labor-hours already paid for in change orders. (AACE)

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e. Exclude any loss that is not recoverable under the contract’s terms, including contractor’s own problems. (AACE) f. Look for several ways to compute a measured mile from the instant project. Report the results using the different ways and bracket them into a high-low range. (Wilson) g. Consider other reference sources. i. Other projects by this contractor, other projects by other contractors. (Society) ii. Other decisions by this court or board. (Luria Brothers) h. Be conservative. Apply the LOP factor to just the crews and the time period involved. (J.A. Jones) i. Check the mathematics: don’t present results that strain credibility, such as a measured mile analysis that claims more damage than a total cost claim. (Southern Comfort) 5. Present the analysis clearly; a. Explain the cause and effect. (J.A. Jones, Southern Comfort, Sunshine Construction) b. Use more than broad, sweeping, unsubstantiated statements, such as “based on my experience.” (Luria Brothers) c. Focus on key points, not minutiae. (J.A. Jones, Clark Concrete, Southern Comfort) d. Include photographs, other graphic aids, correspondence, job diaries, etc. e. Corroborate with other methods such as modified total cost and industry guidelines. f. Rehearse before presenting. Anticipate questions and prepare answers. (Dieterle) g. Tell the truth. (Merritt, Loulakis 2003) These guidelines are not universally and unalterably applicable, but they have been helpful to contractors, owners, consultants, and other parties when preparing and presenting a credible measured mile analysis. Other Project-Specific Studies The measured mile method is often not an option. For instance, estimating the physical units of work and the labor actually expended for both the impacted and unimpacted sections may not be possible. In such cases, the preference is to find another method that uses project cost and

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production data to estimate damages. One such method is “earned value” analysis. However, this method normally requires use of the contractor’s estimate, which may be unreliable or unavailable. Two other related project-specific methods are the “work sampling” and “craftsperson questionnaire sampling” methods. Work sampling requires the claims analyst to observe the productivity of a large number of craftspeople and use that information to estimate how much time they spend on direct, support, and delay work. This method requires unbiased sampling of the workers and cannot be applied retrospectively. The second method asks craftspeople to complete a questionnaire from which estimates of disruptions and disruptive time are collected. Unbiased sampling is key here, too. If the contractor has not attempted or been able to keep particularized labor records, it may resort to industry studies. They are commonly used and commonly misused, as discussed in the following sections. Dozens of studies on the subject of the quantitative loss of productivity exist, as Figure 9-2 illustrates. They fall into two general categories: discrete and cumulative. Discrete studies focus exclusively on one variable and its impact on labor productivity—overtime or weather, for instance—and exclude the impact of any other variable. Their advantage is that the studied variable can be explored in considerable detail, and

Figure 9-2. Loss of Productivity Studies. Source: Ibbs and Lee (2008)

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the resulting model be applied with singular focus to the disrupted project. Cumulative studies are higher-level studies and presume that the effects of one variable cannot be microscopically studied with direct cause-and-effect precision. Instead, a variable such as project change— regardless of the type of change—is contrasted with another variable such as loss of labor productivity. Because both discrete and cumulative studies have validity when properly applied, courts and boards have accepted their use. However, construction projects are not scientific laboratory settings. They are the result of a set of variables interacting with each other over time. The condition of ceteris paribus (all other things being equal) does not apply in the construction industry, so triers-of-fact prefer to see experts who understand the nature and limitations of various industry studies testify as to their reasonable and correct application. Because of space limits, only some of the more prominent studies can be discussed here. Overtime and Shift Work Overtime is the use of labor in excess of the worker’s standard workday and work week, which in the United States is typically an eight-hour day, five-day week. It is not only one of the most common forms of acceleration along with overmanning and shift work, but it is also a common strategy for attracting labor. The Business Roundtable (1980) (BRT) notes that overtime and its premium pay are often used to attract labor to projects that are located in remote areas, have difficult job conditions, or cannot get their fair share of the labor force due to the nature of the work. There are two types of overtime, distinguished by the length of the period of overtime: (1) sporadic or spot overtime and (2) scheduled or extended overtime. Spot overtime is used to handle unexpected problems or to finish time-critical work. Extended overtime usually lasts for at least three consecutive weeks. It is often planned in advance to accommodate special needs such as completing a project earlier than planned or attracting better qualified laborers to the job. The research reported in the professional literature has focused on extended overtime. Kossoris (1947) is generally considered the earliest reliable work on the subject. His study of the wartime manufacturing industry showed that not only is overtime correlated with physical fatigue and loss of productivity, but it also could lead to increased errors and poorer quality

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of work, absenteeism, and accidents. Because the study was not specific to the construction industry, inexplicably used data only from 34 plants out of 800 visited, and employee turnover was abnormally low during World War II, it is generally not considered applicable to construction settings. It did spur a series of other studies that were dedicated to the building industry, notably O’Connor (1969); Howerton (1969); Smith (1975); Adrian (1987); NECA (1989); U.S. Army Corps of Engineers (1979); the Business Roundtable (1980); CII (1988); Thomas (1997); Bromberg (1988); Haneiko and Henry (1991); and Mechanical Contractors Association of America (1994). Figure 9-3 graphically summarizes some of these studies. Not surprisingly, they show that extended periods of overtime lead to lower levels of productivity (efficiency). The BRT study is probably the most widely cited overtime study in the construction industry. However, it must be used judiciously and with an understanding of its background. It was based on construction of a series of small projects at a process plant over a 10-year period in the 1960s in Green Bay, Wisconsin. Observations were made on a weekly basis with records from physical count or actual payroll hours, with productivity measured as a comparison of actual labor-hours to a “fixed standard base” or bogey. Despite its popularity, it has serious flaws: (1) it contains no actual data, only graphs and a table, leading some writers (Seals 2006) to suggest that the curves were not really based on project data but on

Figure 9-3. Various Overtime Studies.

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author opinion; (2) results are not consistent with the references cited as source data or comparative studies—they sometimes misrepresent the Kossoris report, for instance; (3) data were not collected following the standards in the field; (4) data could have been biased, as the author described the circumstances as “tranquil labor relations and excellent field management direction”; (5) Wisconsin was not unionized at the time and its demographics do not reflect today’s population; and (6) construction means, methods, and technology are dramatically different today. The point here is not to criticize the BRT overtime report per se, but to point out the lack of scientific completeness in one key report and the tentativeness of applying even a good study to a current disputed project. It is also important to apply such studies correctly. For example, a laborer spending 20% of his or her time working overtime on a sporadic basis will not experience the same fatiguing effect as a worker continuously working overtime for the last 20% of a project’s duration. Another problem with use of these overtime studies is that the claimant often fails to “reset the overtime clock” (MCAA 2011). That is, the claimant simply totals the number of overtime hours and the straight time hours worked by the overtime crews and then applies the overtime inefficiency percentages to that total. The error is the failure of many claimants to evaluate the consistency of the individual worker’s overtime schedule. It is understood in the industry that when a worker takes time off from an overtime schedule, this time off basically “resets” the worker’s individual inefficiency “clock.” Thus, the BRT and National Electrical Contractors Association (NECA) curves would project that productivity would be reduced by 20% for a 50-hour work week at week seven of continuous overtime. However, if a portion of the crew took a week off at week five because of fatigue and then returned to the project and continued the 50-hour overtime schedule, at week seven its inefficiency would be much less than the 20% that was expected for continuous overtime. Once rest time is allowed, the workers’ inefficiency clock is reset. Thus, where workers are not dedicated to a continuous overtime schedule as represented in the various published curves, a claimant can easily overstate the loss of productivity when rest time is not evaluated. This may require that the claimant review its payroll records to ensure that the entire crew worked continuous overtime before applying the inefficiency percentages contained in the various publications.

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Related to the overtime studies are the shift work studies by Hanna and Sullivan (2004) and Haneiko and Henry (1991) and the nighttime studies by Ellis and Herbsman (1993), Ellis and Kumar (1993), Elrahman and Perry (1998), and Hancher and Taylor (2001). However, the Hanna and Haneiko and Henry study methodologies are not described in sufficient detail, and the other four studies have the limitation of being focused on highway construction. Weather Weather impacts on labor productivity are another much-studied factor. Some of the more notable studies are Clapp (1966), Wittrock (1967), Grimm and Wagner (1974), NECA (2004), Kuipers (1976), Brauer et al. (1984), Koehn and Brown (1985), Oglesby et al. (1989), Thomas and Yiakoumis (1987), Hancher and Abd-Elkhalek (1998), and El-Rayes and Moselhi (2001). Some of these studies appear very sophisticated. Grimm and Wagner, for instance, examined masonry productivity in a study sponsored by the Center for Building Research at the University of Texas under the sponsorship of the U.S. Department of Housing and Urban Development (HUD); a consortium of manufacturers; and the Bricklayers, Masons, and Plasterers International Union. Over a ninemonth period, temperature and humidity were measured and correlated with the work output of 51 masonry workers building 283 test wall panels in 73 U.S. locations. A normal daily production rate was one panel per day. Productivity was found to decline as the temperature and humidity varied from 75°F (24°C) and 60% relative humidity (RH). Analogously, NECA researched the temperature and humidity impacts on productivity for standard electrical tasks (NECA 2004). Over a six-day period, the productivity of two experienced journeyman electricians was tracked while they installed electrical receptacles in premounted junction boxes. The receptacle installation was chosen for measurement because the work is easy to measure and because many units can be installed in an hour, minimizing the error of scale. The subjects were not informed of the objective of the experiment or that temperature and humidity conditions were being changed. The results of the masonry and electrical work, graphically portrayed in Figure 9-4, are similar. Findings included (1) temperature and humidity can affect fatigue and productivity substantially; (2) above 100°F workers showed signs of

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Figure 9-4. Impact of Temperature and Humidity on Productivity. Source: Compiled by Ibbs and Lee (2008) from Grimm (1974) and NECA (2004)

belligerence and irritability and the quality of workmanship deteriorated considerably; (3) unscheduled stoppages of work increased; and (4) carelessness increased, which can lead to safety problems. The most commonly cited problem with these studies is that they were based on an experiment, where the work environment was set up and artificially controlled. The biggest underlying problem of the controlled work environment is in the workers’ psychological reaction, what psychologists call the “Hawthorne Effect.” The journeymen knew they were being watched, and they may in turn have exerted some extraordinary efforts to keep the productivity as high as they could, which would not be the case in real situations. In a post-test interview, one of the journeymen commented after performing at 110°F and 60% RH, “If I was at a jobsite, I would have found something else to do in a cooler work area a long time ago.” Productivity might have been worse in jobsite conditions than in this controlled setting. Small sample size of such experiments reduces the reliability of the outcomes, too. The NECA test relied on only two workers and lasted six days. The work in both cases was highly repetitive and simple, different from what is encountered on most jobsites. They are old studies, the two factors are considered simultaneously, and the raw data are missing, which would allow validation.

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Acceleration Acceleration is the process of speeding construction work. It is not so much a step itself, but rather a result of other events, such as working overtime, adding more resources and shifts, and trade stacking. The studies fall into the category of either case studies (NECA 1984, Thomas and Jansma 1985) or opinions based on industry experience (CII 1988 and CII 1990) rather than analysis of numerous projects. Other Discrete Impact Studies Many other studies of discrete factors exist. For example, Wright (1936) first studied learning-curve effects while investigating the manufacture of World War II bombers. Since then, Carr (1946), Stanford (1949), Hoffman (1950), DeJong (1957), Gabrielsen (1963), United Nations (1965), Parker (1972), Gates and Scarpa (1972), Carlson (1973), Diekmann et al. (1982), Frantzolas (1984), Belkaoui (1986), Thomas et al. (1986), Smith (1989), Oglesby et al. (1989), Haneiko and Henry (1991), Everett and Farghal (1994), Farghal and Everett (1997), Emir (1999), and Singh (2001) have addressed the subject. One contentious issue associated with learning curves is the level of operation to analyze. For example, the U.N. study (1965) found reasonable results when looking at the time required to build houses in a large-scale housing development, whereas Thomas et al. (1986) chose to model the installation of precast floor planks in a six-story building. One of the flaws in Thomas’s study was the means by which the planks were lifted into position, which changed as the work advanced to the upper floors; i.e., a comparison in which the means-and-methods were quite different. Overstaffing and congestion, which add more workers to a task or jobsite than is optimal, are other categories of discrete factors. Waldron (1968) finds that overstaffing by 50% can impair productivity by 30%. Other studies were conducted by O’Connor (1969), Kappaz (1977), Gates and Scarpa (1978), U.S. Army Corps of Engineers (1979), Thomas and Jansma (1985), Smith (1987), NECA (1987), Thomas and Smith (1990), Cass (1992), Gunduz (2004), Hanna et al. (2005), and Mobil Oil (Thomas and Smith 1990). The Corps (1979) reference is especially interesting because the appeals board in Danac16 rejected the contractor’s use of the guide because it was a general statement that was not substantiated by a clear evidentiary link between the guide’s meaning of overmanning and the disputed project’s conditions. Part of the problem was that the

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contractor’s own personnel used the guide rather than an impartial expert. Along similar lines, Cass (1992) looks at the impact of a fluctuating crew size on productivity. This work is more anecdotal and qualitative. Not surprisingly, Cass asserts that steadier crew sizes result in better craft productivity. Other topics that have been studied include storage area organization, material handling and distribution, material availability, and tool and equipment availability (Bilal and Thomas 1990). These studies have had mixed success, largely because the sample size was small. Another well-known industry study is the “Modification Impact Evaluation Guide” (publication EP-415-1-3) by the U.S. Army Corps of Engineers (1979). It identifies four factors as typical causes of labor productivity loss on unchanged work resulting from modifications that impact that unchanged work (change orders): (1) disruption, (2) crowding, (3) acceleration, and (4) morale. Nothing is known about the source of the data used in this report, nor does the report guide the reader in how to combine the four factors. For instance, should they be added together or combined in some offsetting manner? No reports of its successful use in a published decision exist, and the Corps rescinded the publication in July 1996 without explanation. That publication is still used by some claimants, however, and it is important for our readership to understand that it is not officially recognized today. One other technique commonly used to quantify the impact of discrete factors is the Mechanical Contractors Association of America’s (MCAA) Factors Affecting Labor Productivity (the Factors). The MCAA first produced its labor factors publication in 1971 and has since steadily gained popularity. The MCAA Factors publication, with the attendant users’ manual,17 was formally adopted by the Sheet Metal and Air Conditioning National Association (SMACNA) and NECA as applicable to the sheet metal and electrical trades, respectively. The manual’s factors table lists 16 disruptive factors and three levels of severity, each of which has a loss of productivity percentage. While not the result of empirical studies, the Factors have gained wide acceptance in the industry, when applied properly, as a reasonable and reliable means to estimate a contractor’s loss of labor productivity. The Factors are presented in Figure 9-5. In several reported decisions, the Factors have passed the gatekeeper’s scrutiny and have been applied in a manner that resulted in

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Productivity Loss 1. STACKING OF TRADES: Operations take place within physically limited space with other contractors. Results in congestion of personnel, inability to locate tools conveniently, increased loss of tools, additional safety hazards and increased vis it ors. O p t imum crew siz e cannot be ut iliz ed. 2. M ORALE AND ATTITUDE: Excessive hazard, competition for overtime, over-inspection, multiple contract changes and rew ork, disrup t ion of labor rhy t hm and scheduling, p oor sit e condit ions , et c. 3. REASSIGNM ENT OF M ANPOWER: Loss occurs with move-on, move-off men because of unexpected changes, excessive changes, or demand to expedite or reschedule completion of certain work phases. Preparation not possible for orderly change. 4. CREW SIZE INEFFICIENCY: Additional workers to existing crews "breaks up" original team effort, affects labor rhy t hm. A p p lies t o basic cont ract hours also. 5. CONCURRENT OPERATIONS: Stacking of this contractor’s own force. Effect of adding operation to already planned sequence of operations. Unless gradual and controlled implementation of additional operations made, factor w ill ap p ly t o all remaining and p rop osed cont ract hours. 6. DILUTION OF SUPERVISION: Applies to both basic contract and proposed change. Supervision must be diverted to (a) analyze and plan change, (b) stop and replan affected work, c) take-off, order and expedite material and equipment, (d) incorporate change into schedule, (e) instruct foreman and journeyman, (f) supervise work in progress, and (g) revise p unch list s, t est ing and st art -up requirement s. 7. LEARNING CURVE: Period of orientation in order to become familiar with changed condition. If new men are added to project, effects more severe as they learn tool locations, work procedures, etc. Turnover of crew. 8. ERRORS AND OM ISSIONS: Increases in errors and omissions because changes usually performed on crash basis, out of sequence or cause dilut ion of sup ervision or any ot her negat ive fact ors. 9. BENEFICIAL OCCUPANCY: Working over, around or in close proximity to owner's personnel or production equipment. Also badging, noise limitations, dust and special safety requirements and access restrictions because of owner. U sing p remises by ow ner p rior t o cont ract comp let ion. 10. JOINT OCCUPANCY: Change cause work to be performed while facility occupied by other trades and not anticipated under original bid. 11. SITE ACCESS: Interferences with convenient access to work areas, poor man-lift management or large and congested worksite. 12. LOGISTICS: Owner furnished materials and problems of dealing with his storehouse people, no control over material flow to work areas. Also contract changes causing problems of procurement and delivery of materials and rehandling of substituted materials at site. 13. FATIGUE: Unusual physical exertion. If on change order work and men return to base contract work, effects also affect performance on base contract. 14. RIPPLE: Changes in other trades’ work affecting our work such as alteration of our schedule. A solution is to request , at first job meet ing, t hat all change not ices/bullet ins be sent t o our Cont ract M anager. 15. OVERTIM E: Lowers work output and efficiency through physical fatigue and poor mental attitude. 16. SEA SO N A ND WEAT H ER CH A N GE: Eit her very hot or very cold w eat her.

M inor

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Figure 9-5. MCAA Loss of Productivity Factors.

the claimant’s recovery of damages.18 Admittedly, contractors and experts have misused the Factors, and claims have been denied because of their improper application. However, the Factors themselves have not been undermined as to the validity of the individual impact categories or even the three intensity levels assigned to each category. The Factors and percentages were developed by polling the MCAA membership. While the membership is contractors, the use and acceptance of this approach, unchanged for more than 40 years, speaks to the reasonableness of the Factors. As with any method, their application depends upon the knowledge, objectivity, and objectiveness of the person (claimant’s personnel or outside expert) using them. Thus, probative interviews with fact witnesses, jobsite inspection, and careful review of project documentation are vital when using this (or any other) method. This means, among various things, that careful assignment of problems—to the contractor or the owner—is a must.

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The Factors can be applied to estimated or actual labor-hours in accordance with the guidelines and formulas contained in the Factors’ users’ manual published by the MCAA. If the Factors are applied to the estimated hours (the “prospective” method), then any use of estimated hours could be viewed as a form of the modified total labor-hour method. This fact should encourage the claimant to carefully vet the original estimate and remove from the inefficiency calculations all categories of labor-hour losses that are not attributable to the respondent. These modifications can include (1) bid mistakes; (2) inherent market inefficiencies, such as super-heated labor markets; (3) labor-hours attributable to changes in scope; (4) contractor mistakes and rework; and (5) contractor’s lack of adequate management, such as inexperienced supervision or lack of proper tools and materials. The mere assertion that the Factors, when used in a prospective form, can be viewed as a form of a modified total labor-hour method should not necessarily deter their use, given the reported decisions as to the acceptability to the courts of reasoned and reasonable estimates of labor losses. Finally, the 16 factors and three degrees of severity in the MCAA model yield 48 possible combinations of loss of productivity percentage. In the hands of a biased or inexperienced analyst, erroneous results may result. Explaining the chosen particular Factors and intensity in detail is thus advisable. Loss of Productivity Studies Due to Multiple Factors (Cumulative Impact) Cumulative impact is the disruptive effect on labor productive that is the collective result of multiple change orders and other changes that occur during the project. It is sometimes referred to as the ripple effect or loss of efficiency. It does not specifically identify the factors that contribute to productivity losses, but instead captures the loss of productivity arising from all changes occurring on a project and their synergistic effects on the change and base contract work. This loss is usually not subject to analysis in terms of spatial or temporal relationships because its source is not a single event, but rather the synergistic effect arising from multiple labor-intensive changes (Ibbs and Stynchcomb 2014). This cumulative approach considers productivity losses as the collective result of multiple changes in scope (executed change orders, pending scope changes and/or constructive changes) that occur during the project. This methodology assesses the productivity loss at the

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completion of a project and usually, does not specifically identify the individual factors that contribute to the productivity losses. The basis of quantification of the loss of labor productivity is statistical analyses prepared by researchers, such as the Ibbs model (discussed below), who have published data graphs allowing the user to quantify the inefficiencies arising from cumulative impact. The Ibbs graphs rely on proven mathematical models and have a good fit as to the reliability of the regression analyses to compute the loss of productivity values. The end result of such research and industry publications is the ability of a party to a construction contract to estimate the loss of labor productivity on the unchanged work resulting from the cumulative impact of changes to the base contract scope of work. Cumulative impact claims for loss of productivity are the bane of many owners because they are large dollar claims, do not connect the losses to a specific change, and are frequently pursued at the conclusion of the job when the owner believes it has already paid enough. Dozens of cumulative-impact cases are on record, and they are occurring more frequently overseas.19 (See Ibbs and Nguyen 2011, for instance.) The various methods commonly used in professional practice are presented in the following subsections. Leonard’s Model The aforementioned work by the MCAA and the U.S. Army Corps of Engineers stimulated academics to explore the subject of change and its impact on labor productivity. The first notable scientifically based work in this regard was Leonard (1988), which analyzes 90 change instances drawn from 57 electrical-mechanical and civil-architectural projects. Leonard then categorized the projects as Type 1, in which change orders are the only major cause of loss of productivity; Type 2, in which change orders and one other “major factor” cause the loss of productivity; and Type 3, where change orders and two or more other factors are present. Applying statistical regression analysis then allowed Leonard to develop graphs such as Figure 9-6. The most substantial limitation of this study is that the data were derived from the files of a claims consultant, meaning the projects were likely not representative of the industry. Another problem is that Leonard neither clearly defines nor quantifies the presence of the “major factors.” Moreover, if the factors covered by Type 2 and Type 3 curves were sufficiently different from what was anticipated at the

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Figure 9-6. Leonard Loss of Productivity Curve for Civil/Architectural Projects.

time of contract signing, they might have been converted into change orders. The fact that they were not suggests that the factors were not “major.” Finally, Leonard uses linear models to fit the data whereas later analysis indicates that nonlinear models would fit better (Ibbs 2012). Still, the work is important because it pioneered a new line of loss of productivity research and convinced many industry professionals that once change exceeds a certain level (in Leonard’s case, 10%) cumulative impact conditions appear. In such circumstances, foreseeing all the loss of productivity that arises from change is impractical, thus justifying therefore retrospective analyses. Hanna’s Models Hanna et al. (1999a, 1999b) present similar research, introducing six different models: two for electrical, two for mechanical, a model for both electrical and mechanical, and a model for small projects. Generally, the projects are small (less than $5 million in contract value) and performed as a subcontract. Like Ibbs, Hanna found that change late in the project is more disruptive. However, one of the problems with this work is that the input variables for the models differ. As an example, years of project-manager experience is important in one model but not in another. Some of the variables are subjective, such as whether the project’s schedule was compressed. Hanna’s definitions are also vague, which is problematic. For instance, the number of change orders is an input variable for one of Hanna’s models, but no control is imposed on the research to

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differentiate between a small or deductive and a large or additive change order. Hanna’s models seem to have a statistical colinearity problem, meaning that the input variables are not mutually exclusive, resulting in a double-counting effect (Harmon 2006a, 2006b). Despite these problems, his research is still of interest because it affirms that laborintensive change orders may lead to additional productivity loss. Ibbs’s Models Following the aforementioned work, Ibbs (1997, 2005) collected and analyzed data from projects representative of the industry. The projects ranged in size from less than $1 million to more than $15 billion and came from virtually all segments of the industry with different delivery systems. This includes public and private projects, domestic and foreign, heavy/civil, commercial, institutional, and industrial. Ibbs found that projects with more labor-intensive change, as measured in labor-hours of change work, have more loss of productivity, and changes occurring late in a project have greater impact on productivity than early changes. Figure 9-7 shows the impact of change’s timing. Thomas (1992) describes a similar study on nine projects and found similar results. Ibbs’s work has been successfully used in federal and state matters and in international arbitrations, whereas other models, such as Leonard’s and Hanna’s, have been less successful or even outright rejected. Ibbs continues to benchmark projects in this manner and, at the time of

Figure 9-7. Ibbs’ Loss of Productivity Curves.

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this writing, is expanding his database from the original 104 projects to more than two thousand projects. This expanded study will allow further investigation of more variables, such as project delivery system (design-build, design-bid-build, multiple prime); degree of fast tracking; type of project (commercial, industrial, heavy-civil); foreign versus domestic; and so forth. Ways to Strengthen Use of Industry Studies Claimants and/or their experts can strengthen the reliance on industry studies and publications. Claimants and/or experts should carefully read the instructions or users’ manuals that accompany most industry studies and apply the study in strict accordance with those instructions and using the latest published version. They should apply common sense as well. To the fullest extent possible, credible and knowledgeable fact witnesses should be directly involved with the preparation of the loss of labor productivity claim. When preparing a claimant’s loss of labor productivity analysis using industry studies, important to remember is that the results are estimates and not precise determinations of labor inefficiencies. What is important is that these estimates are reliable, reasonable, and, to the fullest extent possible, based on input from the fact witnesses. As explained earlier, dozens of reports, studies, and publications exist showing the quantitative impacts of project change. Many of the studies are old, have incomplete explanations of the underlying research methodology or flawed research methodologies, or are limited to a particular type of construction. Nevertheless, they can provide valuable guidance if the person applying them understands their strengths and limitations and applies them judiciously. These studies can also provide valuable and credible guidance to triers-of-fact. Figure 9-8 contains a set of questions that can be used to understand any of these studies and their suitability to a disputed project. Properly used, these questions will help inquiring counsel determine whether the analyst using the studies understands them and has applied them properly. Total Cost Methods The next two options available for quantifying loss of productivity damages are “total cost” and “modified total cost.” The total cost

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Figure 9-8. Questions to Ask about Loss of Productivity Studies.

method, which is least preferred, simply subtracts the contractor’s bid from what it spent and asserts that the entire difference is due to owner problems. Courts and boards have accepted the method in rare circumstances if the contractor can pass a “four-part test”: 1. The nature of the particular losses make it impracticable, if not impossible, to determine damages in a more particular manner. 2. The contractor’s bid or estimate was reasonable and free from significant and measurable errors. 3. The contractor’s actual costs were reasonable (meaning that the claimant has the challenge of proving mitigation of damages). 4. The contractor was not responsible for any of the events leading to the loss of productivity.20

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An alternative is the modified total cost method, in which contractor problems (bid or work execution mistakes, failure to mitigate problems) and change orders are deducted. It is often helpful to offer a modified total cost calculation as one damages model to show the maximum recovery.

9.4.3. Quantification of Productivity Loss Damages Loss of productivity damages are difficult to quantify because “the various factors that produce the loss of productivity can also serve to preclude the accurate and precise record-keeping that would constitute evidentiary certitude : : : .”21 For that reason, courts and boards normally rely on expert opinion to supplement the facts. The writers have found that using a combination of the previously described methods (modified total cost, measured mile, industry study) frequently give a reasonable range of answers and thus corroborate each other. Another problem that frequently arises in loss of productivity claims is that the contractor uses dollars rather than labor-hours as the basis for its claim. This risks including changes in crew mix or labor rate changes rather than just labor productivity. Applying any quantum method only to the disrupted portion of the project and only to the time period of such disruption is also important. Finally, being be conservative in such analyses is always advisable to offset the criticism that the claim is based on estimates (which is usually the case) rather than actual costs.

9.5. Ways to Improve Productivity Most of this chapter is devoted to the subject of lost productivity because this book is dedicated to construction claims and changes. However, we would be remiss if we did not say a few words about ways to improve productivity. This is, of course, a vast subject that could occupy an entire book, so only a few words can be expressed here. A good start is a thorough review of the project, starting with its goals and the capability of the people who will manage the project. The top management of one large engineering construction company with whom the authors have worked concluded that it generally makes money on projects; however, 80% of the losses it does sustain come from making bad decisions at the outset—specifically by pursuing projects that it recognizes in hindsight were problematic at a very

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fundamental level. Examples of money-losing projects include those not having good, experienced management in place; using the wrong delivery system for the circumstances; relying on a flawed design; or agreeing to an unrealistic schedule. Therefore, careful review of the factors identified in Section 9.3 of this chapter must be conducted; e.g., the project and contract factors, location and environmental factors, and team factors. Proper means and methods and scheduling and resource allocation can be added to this list. Companies that are truly concerned with getting the best productivity and best project results also design and use appropriate project planning and control techniques. A project currently in dispute was ideal for earned-value use, and the contractor promised to utilize a labor performance tracking system in its project proposal. However, this $200-million project is now in dispute because that contractor failed to use its earnedvalue system, and now applying most of the lost productivity quantification methods discussed in this chapter is impossible and contrary to the promises it originally made to secure the project. The 2016 MCAA manual has an important chapter on the subject of maintaining control of labor productivity, which explains the earned-value labor reporting process. Detailed, quantitative measurement of productivity is important. Too often, labor-hours are tracked but not in concert with production, meaning that productivity measurement is not available. Or, the information is tracked at too high a level.22

9.6. Conclusion As the most important determinant in a project’s success or failure, the subject of productivity is crucial to both owners and contractors. This chapter has briefly overviewed some of the key issues associated with understanding and measuring productivity and presenting its loss.

References AACE International. (2004). “Estimating lost labor productivity in construction claims.” Recommended Practice 25R, Morgantown WV. Adrian, J. J. (1987). Construction productivity improvement. Elsevier Science Publishing Co., Inc., New York.

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Belkaoui, A. (1986). The learning curve: A management accounting tool. Quorum Books, Greenwood Press, Westport, CT. Bilal, S., and H. R. Thomas. (1990). “A comparative analysis of labor productivity of masons in seven countries.” PTI Report No. 9036, Pennsylvania State University, University Park, PA. Brauer, R. L., G. J. Brown, E. Koehn, S. T. Brooks, and T. Mahon. (1984). “AFCS climatic zone labor adjustment factors.” Technical Report P-165, U.S. Army Corps of Engineers Construction Engineering Research Laboratory, Champaign, IL. Bromberg, I. (1988). “Impact of overtime on construction.” AACE Transactions, H.3.1–H.3.5. Burke, T. R. (1991). “Productivity Loss Claims,” Surety and Fidelity Claims Conference Association. April 18, 1991. The Business Roundtable. (1980). “Scheduled overtime effect on construction projects.” Construction Industry Cost Effectiveness Task Force Report C-2. New York. Carlson, J. G. H. (1973). “Cubic learning curves: precision tool for labor estimating.” Manufacturing Engineering & Management, 67(11): 22–25. Carr, G. W. (1946). “Peacetime cost estimating requires new learning curves.” Aviation, 45(April): 76–77. Clapp, M. A. (1966). “The effect of adverse weather conditions on productivity on five building sites.” Construction Series Current Paper No. 21, Building Research Establishment, Watford, England. Construction Industry Institute (CII). (1988). “The effects of scheduled overtime and shift schedule on construction craft productivity.” CII SD 43, Austin TX. Construction Industry Institute (CII). (1990). “Concepts and methods of schedule compression.” CII SD-55, Austin TX. DeJong, J. R. (1957). “The effects of increasing skill on cycle time and its consequences for time standards.” Ergonomics, 1(1): 51–60. Diekmann, J. E., D. Horn, and M. O’Connor. (1982). “Utilization of learning curves in damage for delay claims.” Project Management Quarterly. XIII(4): 67–71. Ellis, R. D., Jr., and Z. J. Herbsman (1993). Developing procedures for night operations of transportation construction projects. Transportation Research Center, University of Florida, Gainesville. Ellis, R. D., Jr., and A. Kumar. (1993). “Influence of nighttime operations on construction cost and productivity.” Transportation Research Record No. 1389, Transportation Research Board of the National Research Council, Washington DC, 31–37. Elrahman, O. A., and R. J. Perry. (1998). “Guidelines for night-time maintenance and construction operations.” Road and Transportation Research, 7(3), 3–17. El-Rayes, K., and O. Moselhi. (2001). “Impact of rainfall on the productivity of highway construction.” Journal of Construction Engineering and Management. 127(2): 125–131. Emir, Z. (1999). “Learning curve in construction.” The Revay Report, 18(3), 1–4, Revay and Associates Limited, Montreal. Everett, J. G., and S. Farghal. (1994). “Learning curve predictors for construction field operations.” Journal of Construction Engineering and Management, 120(3): 603–616. Farghal, S. H., and J. G. Everett. (1997). “Learning curves: Accuracy in predicting future performance.” Journal of Construction Engineering and Management, 123(1): 41–45.

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Frantzolas, V. (1984). “Learning curves and work interruptions in construction.” AACE Transactions, C.2.1–C.2.7. Gabrielsen, E. (1963). “The influence of the training effect on production time.” Article published in the Swedish periodical Affärsekonomi, III, 18-27 Stockholm. Gates, M., and A. Scarpa. (1972). “Learning and experience curves.” Journal of the Construction Division, CO(1): 79–101. Gates, M., and A. Scarpa. (1978). “Optimum number of crews.” ASCE Journal of the Construction Division, CO(2): 123–132. Grimm, C. T., and N. K. Wagner. (1974). “Weather effects on mason productivity.” Journal of the Construction Division 100(CO3) 319–335. Gunduz, M. (2004). “A quantitative approach for evaluation of negative impact of overmanning on electrical and mechanical projects.” Building and Environment, 39 (Summer), 581–587. Hancher, D. E., and H. A. Abd-Elkhalek. (1998). “The effect of hot weather on construction labor productivity and costs.” Cost Engineering. 40(4): 32–36. Hancher, D. E., and T. R. B. Taylor. (2001). “Nighttime Construction Issues,” Transportation Research Record 1761, Paper #01-0273. 107–115. Haneiko, J. B., and W. C. Henry. (1991). “Impacts to construction productivity.” Proceedings of the American Power Conference, Chicago, American Power Conference, Vols. 53-II, 897–900. Hanna, A. S., J. Russell, T. W. Gotzion, and E.V. Nordheim. (1999a). “Impact of change orders on labor efficiency for mechanical construction.” (1999b). Journal of Construction and Engineering Management. 125(3). Hanna, A. S., J., Russell, E. V., Nordheim, and M., Bruggink. (1999b). “Impact of change orders on labor efficiency for electrical construction.” Journal of Construction Engineering and Management, 125(4): 224–232. Hanna, A. S., Menches, C. L., Sullivan, K. T., and Sargent, J. R. (2005b). “Factors Affecting Absenteeism in Electrical Construction,” Journal of Construction Engineering and Management. 131(11), November, 1212-1218. Hanna, A. S., C. K. Chang, J. A. Lackney, and K. T. Sullivan. (2005). “Overmanning impact on construction labor productivity.” ASCE Construction Research Congress 2005, April 5–7, ASCE, San Diego. Hoffman, F. S. (1950). “Comments on the modified form of the aircraft progress function.” Report No. RN-464, The Rand Corporation, Santa Monica, CA. Howerton, J. (1969). “Do you know the hidden costs of overtime?” Qualified Contractor, November, 50–52. Ibbs, C. W., et al. (1994). “Project change management.” CII Special Publication 43-1, Austin TX. Ibbs, C. W. (1997). “Quantitative impacts of project change: Size issues.” Journal of Construction Engineering and Management, 123(3): 308–331. Ibbs, W. (2005). “Quantitative impacts of project change: Timing issues.” Journal of Construction Engineering and Management, 131(11): 1219–1223. Ibbs, W. (2012). “Construction change: likelihood, severity, and impact on productivity.” Journal of Legal Affairs & Dispute Resolution in Engineering & Construction, 4(3): 67–73.

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Ibbs, W. (2012b). “Measured mile principles.” Journal of Legal Affairs & Dispute Resolution in Engineering & Construction, 4(2): 31–39. Ibbs, W., and S. Lee. (2008). “Understanding and quantifying the impact of changes on construction labor productivity.” University of California at Berkeley Technical Report. Ibbs, W., and M. Liu. (2005). “Improved measured mile analysis technique.” Journal of Construction Engineering and Management, 131(12): 1249–1256. Ibbs, W., and L. D. Nguyen. (2011). “Cases and board decisions on cumulative impact claims.” The Construction Lawyer, 31(4): 32–41. Ibbs, W., and P. L. Stynchcomb. (2013). “Utilizing industry studies in preparing and presenting loss of labor productivity claims.” The American Bar Association Forum on the Construction Industry Midwinter Conference, Naples, FL. Ibbs, W., and P. L. Stynchcomb (2014). Change Orders, Productivity, Overtime: A Primer for the Construction Industry. Mechanical Contractors of America, Rockville MD. Ibbs, W., and C. Vaughn. (2013). “Changes and the loss of productivity in construction: A field guide.” University of California at Berkeley Technical Report. Jones, R. M. (2001). “Lost productivity: Claims for the cumulative impact of multiple change orders.” Public Contract Law Journal, 31(1): 1–46. Jones, R. M. (2003). “Update on proving and pricing inefficiency claims.” The Construction Lawyer, Summer: 3–11. Kappaz, M. H. (1977). “Effect of scope changes on schedule: A systems approach.” AACE Bulletin, 19(6): 221–224, 237. Koehn, E., and G. Brown. (1985). “Climatic effects on construction,” Journal of Construction Engineering and Management, 111(2): 129–137. Kossoris, M. (1947). “Hours of work and output (studies of the effects of the long working hours).” Bulletin 917, Bureau of Labor Statistics, U.S. Department of Labor, Washington, DC. Kuipers, E. J. (1976). “A method of forecasting the efficiency of construction labor in any climatological conditions.” Ph.D. Dissertation, University of Illinois at Urbana–Champaign. Lee, S. (2007). “Understanding and quantifying the impact of changes on construction labor productivity: Integration of productivity factors and quantification methods.” Ph.D. Dissertation, University of California at Berkeley. Leonard, C. A. (1988). “The effects of change orders on productivity.” MS Thesis, Concordia University, Montreal. Loulakis, M. C., and S. J. Santiago (1999). “Getting the Most Out of your ‘Measured Mile’ Approach”, Civil Engineering. November, 69. Loulakis, M. C., C. Gaba, and R. Rodrigues, (2003). “The Measured Mile Approach,” Civil Engineering. 73(11), November, 96. Mechanical Contractors Association of America. (2014). Change orders, productivity, overtime: A primer for the construction industry. Rockville, MD. National Electrical Contractors Association (NECA). (1974). The effect of temperature on productivity. Bethesda, MD. National Electrical Contractors Association (NECA). (1984). Normal project duration in electrical construction report. Bethesda, MD.

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National Electrical Contractors Association (NECA). (1987). Electrical construction peak workforce report, 2nd Ed. Bethesda, MD. National Electrical Contractors Association (NECA). (1989). “Overtime and productivity in electrical construction.” Index No. 5050-2M-1999-Jan, Bethesda, MD. National Electrical Contractors Association (NECA). (2004). “The effect of temperature on productivity.” Report No. 5072-04, Bethesda, MD. O’Connor, L. V. (1969). “Overcoming the problems of scheduling on large central station boilers.” American Power Conference, Vol. 31, April, 518–528. Oglesby, C. H., H. W. Parker, and G. A. Howell. (1989). Productivity improvement in construction, McGraw-Hill, New York. Singh, A. (2001). “Claim evaluation for combined effect of multiple claim factors.” Cost Engineering, 43(12), 19–31. Smith, G. (1975). “Extended Overtime and Construction Productivity”, AACE Transactions. H.1, AACE International, Morgantown, WV, 276–282. Smith, A. G. (1987). “Increasing onsite production.” AACE Transactions, No volume or issue #VOL(ISS?): K.4.1–K.4.13. Smith, J. (1989). Learning curve for cost control, Institute of Industrial Engineers, Georgia, 7–21. Stanford Research Institute. (1949). “An improved rational and mathematical explanation of the progress curve in airframe production.” Stanford, CA. Stynchcomb, P., and W. Ibbs. (2014). “How to Estimate the Effects of Cumulative Impacts.” Change Orders, Productivity, Overtime: A Primer for the Construction Industry, MCAA, Rockville MD. Thomas, H. R. (2010). “Quantification of losses of labor efficiencies: Innovations in and improvements to the measured mile.” Journal of Legal Affairs and Dispute Resolution in Engineering and Construction. 2(2): 106–112. Thomas, H. R., Jr., and G. L. Jansma. (1985). “Quantifying construction productivity losses associated with an accelerated schedule.” CII Report SD-47. Thomas, H. R., C. T. Mathews, and J. G. Ward. (1986). “Learning curve models of construction productivity.” Journal of Construction Engineering and Management, 112(2): 245–258. Thomas, H. R., and G. R. Smith. (1990). “Loss of construction labor productivity due to inefficiencies and disruptions: The weight of expert opinion.” PTI Report 9019, Pennsylvania Transportation Institute, University Park PA. Thomas, H. R., and I. Yiakoumis. (1987). “Factor model of construction productivity.” Journal of Construction Engineering and Management. 113 (4): 623–631. United Nations. (1965). “Effect of repetition on building operations and processes on site.” ST/ECE/HOU/14, United Nations Committee on Housing, Building, and Planning, New York. U.S. Army Corps of Engineers. (1979). “Modification impact evaluation guide.” EP 415-1-3, Department of the Army Office of the Chief of Engineers, Washington, DC. Waldron, A. J. (1968). Applied principles of project planning and control, 2nd Ed., Morrison, NY. Wittrock, J. (1967). “Reducing seasonal unemployment in the construction industry.” OECD, Washington DC, 284–292.

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Wright, T. P. (1936). “Factors affecting the cost of airplanes.” Journal of the Aeronautical Sciences, 3: 122–128. Zink, D. A. (1986). “The measured mile: Proving construction inefficiency costs.” Cost Engineering, 28(4): 19–21.

Endnotes 1. Centex Bateson Constr. Co., VABCA Nos. 4613, 5162–565, 99–1 BCA¶ 30,153, 149,258, aff’d, Centex Bateson Constr. Co. v. West, 250 F.3d 761 (Fed. Cir. 2000); Acme Missiles & Constr. Corp., ASBCA Nos. 11256, 11716, 68–1 BCA ¶ 6873, 31, 770; Atlantic Dry Dock Corp., 733 F. Supp. at 340 n. 1. (M.D. Fla. 1991). 2. Shea, Thomas E. (1989). “Proving Productivity Losses in Government Contracts,” Public Contract Law Journal. 18(2), March, 414–431. 3. Portions of this chapter were presented at an American Bar Association conference; see Ibbs and Stynchcomb (2013). 4. Some companies and agencies refer to productivity in the inverse way; i.e., so many labor-hours per lineal ft of pipe. The two methods are mathematically equivalent. 5. Centex Bateson. “Impact costs are additional costs occurring as a result of the loss of productivity; loss of productivity is also termed inefficiency. Thus, impact costs are simply increased labor costs that stem from the disruption to labor productivity resulting from a change in working conditions caused by a contract change. Productivity is inversely proportional to the man-hours necessary to produce a given unit of product. As is self-evident, if productivity declines, the number of man-hours of labor to produce a given task will increase. If the number of man-hours increases, labor costs obviously increase”. 6. Centex Bateson Constr. Co. 7. Centex Bateson; Bechtel Nat’l, Inc., NASA B.C.A. No. 1186-7, 90–3 B.C.A. ¶ 22,549 at 113,177; and Acme Missiles & Constr. Corp., A.S.B.C.A. Nos. 11256, 11716, 68–1 B.C.A. ¶ 6873 at 31,770. 8. Centex Bateson. 9. Centex Bateson and Freeman-Darling, Inc., GSBCA No. 7112, 89–2 BCA ¶ 21,882. 10. See Sauer Inc., v. U.S., U.S. Fed Circuit Court of Appeals, 99-1206, where the board wrote, “It is a rare case where loss of productivity can be proven by books and records; almost always has to be proven by the opinions of expert witnesses. However, the mere expression of an estimate as to the amount of the productivity loss by an expert witness with nothing to support it will not establish the fundamental fact of resultant injury nor provide a sufficient basis for making a reasonably correct approximation of damages.” And J.A. Jones v. U.S., E.N.G.B.C. A. Nos. 6348, 6386–91, 00–2 B.C.A. ¶ 31,000; and Clark Construction v. U.S., V.A.B. C.A. No. 564, 00–1 B.C.A. ¶ 30,870. Also, Ibbs and Nguyen (2011). 11. Sauer, Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000). Delay claims usually include indirect costs such as extended overhead, increased equipment, and financing costs. Also, see Burke (1991).

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12. The writer was involved in one project dispute where a change occurred every eight hours. The contract required the contractor to prepare a full cost and schedule estimate for each change order request (COR) when, at the same time, owner responses to such proposed requests averaged 30 days. This delay in responses made it impossible for the contractor to prepare complete estimates when as many as 29 undecided CORs were outstanding. 13. See E.C. Ernst, Inc. v. Koppers Company, 476 F. Supp. 729 (W.D. Pa. 1979); United States Industries v. Blake Construction Co., 26 671 F.2d 539 (D.C. Cir. 1982); Appeal of Batteast Company, ASBCA No. 35818 (Dec. 31, 1991); Goodwin Contractors, Inc. AGBCA No. 89-148-1, 92-2 BCA (CCH) ¶24,931 (1992); and Clark Concrete Contractors, Inc. v. General Services Administration, GSBCA No. 14340, 99-1 BCA (CCH) ¶30,280 (1999). 14. Appeal of P.J. Dick Inc., VABCA Nos. 5597, 5836-5837, 5839-5850, 5951-5965 and 6017-6024, 01-2 BCA ¶ 31,647 (Sep. 27, 2001), aff’d in part, rev’d in part, vacated in part, and remanded, all on other grounds sub nom. The government’s acceleration of the work resulted in the general contractor directing a subcontractor to work on floors concurrently in an attempt to make up the time the government had delayed completion. The result was that the subcontractor was forced to assign multiple crews on each floor that were required to perform all aspects of branch circuit installation, causing labor inefficiencies. A measured mile analysis comparing branch circuit productivity to feeder circuit productivity was allowed by the board to quantify labor inefficiency. 15. Measured mile guidelines—cases cited: AACEI (2004). Estimating Lost Labor Productivity in Construction Claims. AACE RP25R-3. Appeal of Batteast Construction Co., Inc., ASBCA Nos. 35,818 & 36,609, 92-1 BCA ¶ 24,697. (Dec 31, 1981). Appeal of Bay Construction Co. VABCA no. 5594, 02-1 BCA (2002) WL 442118. Appeal of Bay West, ASBCA No. 54166, April 25, 2007. Board allows use of measured mile, but it must be adjusted for learning curve and conditions accurately indicated in contract documents. Bell BCI Co. v. United States, 72 Fed. CL. 164, 168 (2006). Calvey, Timothy T., and Zollinger III, William R., “Measured Mile Analysis,” 2003 AACE International Transactions. EST.03.1 to EST.03.6. Clark Concrete Contractors, Inc. v. General Services Administration, GSBCA No. 14340, 99-1 BCA ¶ 30,280. Daewoo Engineering and Construction Ltd v. U.S. 73FedCl 547(2006). P.J. Dick Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003). Dieterle, Robert A. (1985). “Damage Issues in Construction Claims,” Cost Engineering. 27(2), Feb., 13-17. E.C. Ernst, Inc. v. Koppers Company, Inc. U.S. Court of Appeals, 626 F.2d 324, 327 (3d Cir. 1980). 476 F. Supp. 729 (W.D. Pa. 1979). James Corporation v. North Allegheny School District, No. 1268 C.D. 2007. J.A. Jones Construction Company v. Corps of Engineers. BCA, ENG BCA Nos. 6348, 6386-6391. 00-2 B.C.A. (CCH) ¶ 31,000. July 7, 2000.

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18.

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Keane, P.J. and A.F. Caletka, Excerpts of Delay Analysis in Construction Contracts. Wiley-Blackwell 2008. Lamb Engineering & Construction Co., Eng. BCA No. C-9304172, 97-2 BCA ¶ 29,207. Luria Bothers & Co. v. United States, 369 F2d. 701 (Ct. Cl. 1966). Maryland Sanitary Manufacturing Corp. v. United States, 199 Ct. Cl. 100 (1951). Robert McMullan & Sons, Inc. ASBCA No. 191229, 76-2 BCA ¶ 12,072, at 57,947, 962. Natkin & Co. v. George A. Fuller Co. 347 F. Supp. 17 (W.D. Mo. 1972), reconsidered, 626 F.2d 324 (8th Cir. 1980). Presnell, Thomas W. (2003). “’Measured Mile’ Process to Support Equitable Recovery of Production Inefficiency Claims,” Cost Engineering. 45(11), Nov., 14-20. P.W. Construction, Inc. v. U.S., 53 Fed. Appx. 555 (Fed. Cir. 2002). Serag, Engy (2010). Change Orders and Productivity Loss Quantification Using Verifiable Site Data. University of Central Florida, Ph.D. dissertation. Shea, Thomas E. (1989). “Proving Productivity Losses in Government Contracts,” Public Contract Law Journal. 18(2), March, 414-431. Society of Construction Law (2002). The Society of Construction Law Delay and Disruption Protocol. October.Southern Comfort Builders, Inc. v. United States, No. 00-542C, July 29, 2005. Sunshine Construction & Engineering, Inc., v. United States, No. 02-250C (March 4, 2005). Thomas, H. Randolph and Oloufa, Amr A. (1995). “Labor Productivity, Disruptions, and the Ripple Effect,” Cost Engineering, American Association of Cost Engineers, 37(12), December, 49-54. Wilson, Roy L., “Use and Abuse of the Measured Mile,” Journal of Construction Accounting and Taxation. Winter 1993. Zink, Dwight A. (1986). “The Measured Mile: Proving Construction Inefficiency Costs,” Cost Engineering. 28(4), 19-21. Danac, Inc., ASBCA 33394, 97-2 BCA ¶ 29184. As published in the book titled Change Orders, Productivity, Overtime: A Primer for the Construction Industry. All excerpts printed herein are with the permission of the MCAA. A notable example is Hensel Phelps Construction Co. v. General Services Administration, GSBCA No. 14744, 01-1 BCA ¶ 31,249 (Jan. 11, 2001). The board concluded that the expert’s conservative application in this case was actually more credible than the measured mile that was prepared. Appeal of Atlas Construction Co., Inc. GSBCA Nos. 7903, 8143, and 8593, 90-2, (1990), reconsid, denied, GSBCA Nos. 7903-R, 8143-R, 8593-R, and 8653-R, 1990 WL 140492 (1990), where the contractor’s performance “was burdened by the number of change orders, hidden conditions and tenant directed changes.” Bechtel National, Inc., NASA Board of Contract Appeals No. 1186-7, 90-3 BCA ¶ 22,549, 113,177 December 22, 1989, where the court said, “Cumulative impact need not be traced to specific causes of increased performance costs, but can arise from changes which, when viewed retrospectively, were so many and had such effect on performance that there is a separately compensable impact claim.” Bell

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BCI Company v. U.S., No. 03-1613C, 81 Fed. Cl. 617, 637 (2008); Boyajian v. United States, 423 F.2d. 1231 (U.S. Ct. Claims, 1970); Clark Construction Group, VABCA No. 5674, 00-1 BCA ¶ 30,870 (April 5, 2000); Clark Concrete Contractors, Inc. v. General Services Administration, GSBCA No. 14340, 99-1 BCA ¶ 30,280, WLL 1999. 143977 (Mar. 15, 1999) reconsid. denied; Elte, Inc. v. S.S. Mullen, Inc., 469 F.2d 1127 (1972); Haas & Haynie Corp., GSBCA Nos. 5530, 6224, 6638, 6919-20, 84-2, BCA ¶ 17,446, 86,897. June 8, 1984, Contract No. GS-09B-C-7003-SF; Jackson Construction Co., Inc. v. United States, 62 Fed. Cl. 84, 103 (2004); J.A.Jones Construction Company v. Corps of Engineers BCA, ENG BCA Nos. 6348, 63866391. 00-2 B.C.A. (CCH) ¶ 31,000. July 7, 2000; Litton Systems, Inc., Ingalls Shipbuilding Division, ASBCA No. 17578, 78-1 B.C.A. (CCH) ¶ 13,038 (1978); Luria Brothers & Co. v. U.S., 369 F.2d 701 (Ct. Cl. Dec. 16, 1966); Robert McMullan & Sons, Inc. ASBCA No. 19,129, 76-2 BCA ¶ 12,072, at 57,947, 962; Pittman Construction Company, Inc. v. U.S., 2 Ct. Cl. 211, 216 (1983); Saudi Tarmac Co. Ltd. ENG BCA No. 4841, 89-2 B.C.A. (CCH) ¶ 21,6444 (1989); Appeal of Stroh Corp. v. General Services Admin., GSBCA No. 11,029, 96-1 BCA ¶ 28,265. And overseas in Australia: Nauru Phosphates Royalties Trust v. Matthew Hall Mechanical and Electrical Engineers Pty Ltd (1994) BCL 179; Carr v JA Berriman Pty Ltd (1953) 89 CLR 327, followed by Council of the City of Sydney v Goldspar Australia Pty Limited [2006] FCA 472 (3 May 2006); Shell Refining Pty Limited v A J Mayr Engineering Pty Limited [2006] NSWSC; Siemens v Tolco; John Holland Property Ltd v Hunter Valley Earth Moving [2003] Const. LJ 171 (New South Wales); Tolco v Siemens [2007] NSWSC 257; Laing O'Rourke Australia Construction v H&M Engineering & Construction [2010] NSWSC 818; John Holland Construction Engineering Pty Ltd v Kvaerner RJ Brown Pty Ltd (1996) 13 BCL. In Hong Kong: Wharf Properties v Eric Cumine Associates [1991] 52 BLR 8 at 15. In the UK, J Crosby & Son v Portland UTC [1967] 5 BLR 121; Merton LBC v Stanley Hugh Leach Ltd [1985] 32 BLR 51; Mid Glamorgan County Council v J. Devonald Williams & Partner [1992] 29 Con LR 129; McAlpine Humberoak v McDermott International [1992] 52 BLR 1; ICI v Bovis Construction Ltd [1993] Con LR 90; British Airways Pensions Trustees Ltd v Sir Robert McAlpine & Sons Ltd [1994] 72 BLR 26; Bernhard’s Rugby Landscapes Ltd v Stockley Park Consortium Ltd [1997] 82 BLR 39; AMEC Process & Energy Ltd v Stork Engineers & Contractors BV (Unreported); and John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2004] BLR 295, where the court said “ : : : if it cannot be said that events for which the employer is responsible are the dominant cause of the loss, it may be possible to apportion the loss between the causes for which the employer is responsible and other causes : : : Where the consequence is delay as against disruption, that can be done fairly readily on the basis of the time during which each of the causes was operative. During [that period] each should normally be treated as contributing to the loss, with the result that the employer is responsible for only part of the delay during that period. Unless there are special reasons to the contrary, responsibility during that period should probably be divided on an equal basis : : : ”. 20. This standard has been used by many courts, including Amelco Electric v. City of Thousand Oaks, 27 Cal. 4th 228; 115 Cal. Rptr. 2d 900; 38 P.3rd 1120 (Feb 2002); 98 Cal Rptr. 2d at 168.

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21. Shea, Thomas E. (1989). “Proving Productivity Losses in Government Contracts,” Public Contract Law Journal. 18(2), March, 414-431. 22. The authors were consultants on a highway renovation project that involved 32 bridges, but all the formwork quantities and labor hours were tracked in one cost code for this 13-mile project. We were therefore not able to distinguish between productivity problems that occurred only on the bridges that had owner-caused problems.

Chapter 10

Subcontractors and Suppliers Christopher M. Anzideia

10.1. Introduction Subcontractors and suppliers face many risks that could erode anticipated profit margins and even expose them to substantial liability in the event of delays or cost overruns. Further risks arise under their subcontracts, which typically include one-sided provisions and riskshifting clauses imposed by the general contractor. On many projects, onerous contract terms flow down from the owner’s contract with the general contractor. In addition, subcontractors often face stringent deadlines and have limited input into the scheduling and coordination of their work. Of course, this circumstance is not ideal, and the industry is beginning to acknowledge that collaboration, communication, and coordination are keys to a successful project. This is often reflected in more balanced subcontract terms, greater involvement in project scheduling and coordination, and better protocols for sharing information and identifying and mitigating project risks. In addition, courts have long recognized that general contractors owe several express and implied duties to their subcontractors, including duties to act in good faith, cooperate, and not hinder the subcontractor’s performance.1 This chapter examines the rights and responsibilities of a

Staff Counsel, Catholic Archdiocese of Washington, DC 243

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subcontractors and suppliers relating to construction claims and change orders.

10.2. General Contractor’s Duty of Performance The general contractor must be very careful in acting as a two-way conduit between the subcontractor and the owner. The general contractor can be held responsible for any delays it causes by failing to take appropriate action in processing directives, changes, or claims. Proper coordination of subcontractors is not only a core tenet of good construction management, but also enhances the potential for recovery from the owner when claims or change orders do arise. For obvious protective reasons, all correspondence and other communications between the subcontractor and the general contractor should be timely and well documented. The general contractor must also be careful to avoid exposure to disparate liability that could occur when the contractor fails to submit a subcontractor’s valid change requests or claims to the owner in a timely manner. A general contractor may lose the benefit of certain defenses if it has not properly performed its duties. For example, a general contractor may not be permitted to rely upon exculpatory clauses (such as “no damages for delay” or “pay when paid” protections) if the general contractor’s own actions prevented the subcontractor’s recovery on its pass-through claims.2

10.3. Contractor–Subcontractor Relationship The general contractor is well served by communicating with its subcontractors regarding the overall schedule and phasing of the work. By asking the subcontractor to participate in preparing the critical path method (CPM) schedule, updating the schedule, and coordinating the work, the general contractor fulfills an essential duty, partners with the subcontractor, and creates an atmosphere of cooperation. Such cooperation supports mutual resolution of job problems and elimination of scheduling conflicts and misunderstandings that might result in claims between the subcontractor and general contractor. If the contractor does not indicate its intention to involve the subcontractor in CPM formulation or coordination, the subcontractor

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should take the initiative by encouraging the general contractor to do so. If the general contractor’s cooperation is still lacking, the subcontractor should proceed with its work as best as it can, with frequent notice to the general contractor of any coordination requirements, deadlines, disruptions, or impediments that could affect the successful completion of its work.

10.4. Subcontractor–Owner Claims Very often on a construction job, claim events or owner-directed changes arise that primarily affect the subcontractor. Although no privity of contract exists between the owner and subcontractor, the general contractor often lets the two parties handle the matter directly, acting only as a conduit for contractual purposes. This typically occurs where the general contractor has little or no financial stake in the claim (except perhaps a markup on the subcontractor’s costs). Subcontracts often permit the subcontractor to pursue its passthrough claims directly against the owner (and at the subcontractor’s own expense) in the name of the general contractor. These practices, although common, are not always in the general contractor’s best interest. While the general contractor does not want unresolved subcontractor problems to affect its performance, the general contractor should nevertheless attempt to participate in the resolution of all subcontractor–owner problems. This is necessary both to protect the general contractor’s own interests and to make sure the subcontractor is acting to resolve problems expeditiously and appropriately. Also, subcontractors are often less experienced or adept than the general contractor in handling such problems and will benefit from the general contractor’s assistance.

10.5. Suppliers Suppliers face many of the same risks as subcontractors on construction projects, and suppliers often pose potential risks to both the subcontractor and general contractor, which can undermine the overall success of the project. Such risks may arise from purchase order terms, proprietary

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specifications, submittal delays in the shop drawing or approval process, late production, and schedule delays.

10.5.1. Supplier Purchase Orders The contractor (and subcontractors, as applicable) should do everything possible to avoid supplier problems by writing explicit purchase orders (with appropriate lead times and clear delivery dates), keeping adequate inventory of parts and supplies and actively monitoring the supplier’s activities. Of course, when writing purchase orders and accepting supplier acknowledgments, the contractor and subcontractor should ensure that any applicable prime contract or subcontract terms flow down to the supplier. Thus, acknowledgments and other documents received from the supplier should be scrutinized to ensure they do not create terms that are inconsistent with the purchase order or other contract requirements. One particular issue that often arises is the supplier’s attempt to disclaim express and implied warranties. Express warranties are often included in published specifications, sales catalogs, and other promotions. Even though not a part of, and not required by, the specifications between the owner and contractor, the owner may rely on these representations and attempt to enforce them against the contractor and/or supplier. Any attempt by a supplier to limit or disclaim prior express warranties is cause for concern. An implied warranty can also arise when a seller is aware of the intended use of its product and thus warrants that the product is suitable for that particular purpose. Sellers may disclaim implied warranties, particularly for consequential damages, offering only to replace the defective product. This does not relieve the contractor of potentially costly obligations to the owner if the product fails to perform properly. For these reasons, contractors must be extremely cautious about accepting supplier terms, conditions, and qualifications contained in purchase order acknowledgments. The best defense here is to notify suppliers in writing of any objections to preprinted clauses or acknowledgment exceptions and the intent to rely on express representations by the supplier. These actions may lead to the battle of the forms, each party trying to have its own terms prevail. Because contractor–supplier purchase orders are a frequent subject of litigation, the contractor is well advised to consult legal counsel before drafting purchase orders or accepting acknowledgments that offer the potential to affect the outcome of the job.

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10.5.2. Proprietary Specifications—Contractor’s Right to Substitute Private project owners have the right to specify proprietary products and models. Public project owners do not. Due to open competition requirements found in statutes and regulations, public entities may name a desired product, but must allow the substitution of “equal” products. This assures that favoritism is not granted to one particular supplier and allows the taxpayers the possibility of a lower price. The determination of an “equal” substitute product is not supposed to be subjective. The contract documents identify the “salient characteristics” of the named product, which make that product desirable for the project. If a characteristic is of a performance nature, the substitute is required to be functionally equivalent. But if design characteristics of the specified brand are listed, a substitute product must conform.3 The salient characteristics stated in the contract documents must be honored. A public project owner cannot interject his or her subjective judgment to waive or alter the determination of an “equal” product.4 Once the project owner’s designated decision maker approves a product based upon possession of the specified salient characteristics, the owner becomes bound by that decision.5 In some cases, the failure of the contract documents to specify the salient characteristics of a named proprietary product will render those specifications defective.6 Disguised or covert proprietary specifications do not name a particular product and therefore do not list salient characteristics, but they can only be met by one product. The use of these specifications is discouraged.7

10.5.3. Delays, Drawing Approvals It is imperative that subcontractors and general contractors properly manage the shop drawing and approval process for any materials provided by suppliers. This is necessary to ensure that the materials to be supplied will conform to the contract requirements and to avoid any delays arising from late production or delivery. Because shop drawings and submittals are often required from suppliers, the contractor must allow sufficient time for approval of drawings and must maintain accurate records of all transactions and transmittals involving the supplier. Contract delays caused by a supplier can be excused when they are shown to be beyond the supplier’s control, such as a result of strikes,

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unavailability of owner-specified materials, or force majeure events. Delayed approval of submittals by the owner can also contribute to contract delays and may result in excusable and compensable delay.

10.5.4. Supplier Schedules Suppliers (and subcontractors) should know where they fit into the CPM schedule and should be obligated to provide their own detailed schedules that meet the overall CPM requirements. These schedules should contain milestones for monitoring supplier activities, and the supplier should produce periodic updates or status reports. The contractor is responsible for securing materials and thus must do everything possible to meet this obligation and not imperil the project.

10.6. Documentation of General Contractor/ Subcontractor/Supplier Transactions: Documenting Delays For claims arising from contractor–supplier problems, detailed records are very beneficial for ensuring proper compliance with the plans and specifications and documenting and allocating responsibility for delays, including delays arising from shop drawings, architect or owner approvals, design changes, production problems, or force majeure events. Such documentation often includes the baseline schedule, monthly schedule updates and narratives, daily reports and crew timesheets, photographs, submittals, requests for information (RFIs), meeting minutes, change orders, and other project correspondence. Contract documents usually specify the expected length of time for drawing approvals, but the contractor has a right to expect approvals within a reasonable length of time, even in the absence of a specific provision. Frequently, contributory or concurrent delays attributable to both the owner (or its representative) and the contractor (including its subcontractors and suppliers) occur. Where possible, courts will apportion responsibility for delays and award delay damages where the contractor can provide sufficient documentation to isolate periods of owner-caused delay from contractor delays.8 Even if the contractor can establish concurrent delays, however, the contractor will still be entitled to an extension of time for the period of delay for which the owner is

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responsible.9 Thus, proper documentation of project delays is essential to establish a claim for additional time or money.

10.7. Other Contractor–Subcontractor Claim Issues Subcontractors and general contractors should also be aware of other important considerations that could impact claims recovery, including the legality of pass-through claims and liquidating agreements, risks associated with sponsoring claims, the potential impact of pay-if-paid and pay-when-paid clauses, potential rights and remedies under mechanic’s lien statutes and surety bonds, trust fund statutes and other remedies, and the potential impact of mediation and arbitration provisions in subcontracts.

10.7.1. Severin Doctrine and Agreement Liquidation Another transaction requiring careful scrutiny is the general contractor’s handling of subcontract change order requests and claims that arise from the acts, errors, or omissions of the owner (particularly on a design-bidbuild project). The general contractor does not want to expose itself to disparate liability exposure by executing a modification with one party while the change event remains unsettled with the other. For this reason, a subcontract modification arising from an owner-caused delay or change should not be agreed to by the general contractor until the same modification has been agreed upon and executed between the general contractor and owner. In addition, when pursuing pass-through claims against the owner (particularly on public projects), general contractors and subcontractors must take the appropriate steps to ensure compliance with the “Severin doctrine,” which arose from the seminal Court of Claims case, Severin v. United States.10 Under the Severin doctrine, a subcontractor may not recover from the United States on a pass-through claim asserted in the name of the prime contractor unless the prime contractor remains liable to the subcontractor for any amounts recovered. The most typical arrangement used to comply with the Severin doctrine is for the general contractor and subcontractor to execute a “liquidating agreement,” whereby the general contractor remains liable to the subcontractor for a pass-through claim, but only to the extent of any

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recovery from the owner.11 Nearly every state that has addressed this issue has also allowed pass-through claims to be pursued in this manner.12

10.7.2. Sponsorship of Agreements for Subcontractor Pass-Through Claims Several years ago, before a subcontractor claim could be pursued against the owner, the subcontractor had first to prevail against the contractor, who in turn would then pursue relief from the owner. Sponsoring agreements have been implemented to overcome these obstacles. Either a sponsoring agreement can allow the prime contractor to litigate the subcontractor’s pass-through claim on the subcontractor’s behalf or the agreement could allow the subcontractor to pursue its pass-through claim in the name of the prime contractor. In both instances, the subcontractor usually bears the expense of litigating its claim. On federal projects, a prime contractor does not need to admit liability to the subcontractor to sponsor its claim. The claim must, however, be properly certified, as required by the Contracts Disputes Act, and brought in good faith. The prime contractor satisfies its goodfaith obligation if it has a reasonable belief that the subcontractor has a “good ground” for bringing the sponsored claim.13 On private construction contracts, some courts have required the prime contractor to admit liability for the claim as a prerequisite for a court to hear the dispute. Other courts have allowed such claims to proceed as long as the subcontractor has not waived its rights against the prime contractor. These safeguards are intended to prevent the prime contractor from irresponsibly passing through claims that are unsubstantiated in fact or lacking in cost support.

10.7.3. Pay-If-Paid and Pay-When-Paid Provisions Many subcontracts include “pay-if-paid” or “pay-when-paid” provisions. A pay-if-paid provision shifts the risk of owner nonpayment from the general contractor to the subcontractor, while a pay-when-paid clause typically requires the general contractor to make payment within a specified period of time. Many courts have held these clauses to be valid and enforceable, particularly where the subcontract language is unambiguous and expressly provides that payment from the owner is a “condition precedent” to payment to the subcontractor.14

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General contractors should be aware, however, that courts have declined to enforce these provisions in circumstances where the court finds that the general contractor’s own actions were the cause of the owner’s delay or refusal to make payment.15 In addition, other courts have held that pay-if-paid provisions are void and unenforceable because they violate public policy.16

10.7.4. Mechanic’s Lien Remedies Contractors, subcontractors, and suppliers that perform work on privately owned projects should be familiar with the mechanic’s lien statute enacted in the state where the project is being performed. All 50 states and the District of Columbia have enacted mechanic’s lien statutes. These statutes are intended to protect unpaid contractors, subcontractors, and suppliers by allowing them to file and enforce a lien on the real property that encumbers the improved property to the extent of the amount due. A mechanic’s lien is a state-specific, statutorily created remedy. Each state has enacted different statutory requirements with provisions that could affect, among other things, (1) who may file a mechanic’s lien, (2) what property is subject to the lien, (3) when the lien may be filed, (4) what must be included in the lien filing, (5) whom must be given notice of the lien and how the notice must be provided, (6) what damages may be included in the lien amount, (7) how and when the lien will be enforced, (8) what defenses exist to the lien, (9) whether lien rights can be waived, and (10) what priority the lien gives the claimant vis-à-vis other creditors. As but one example of the variation in state laws, the District of Columbia lien statute limits the mechanic’s lien remedy to general contractors and their first-tier subcontractors and suppliers, while Virginia’s statute extends to claimants beyond the first tier.17 Given that mechanic’s lien statutes are state specific and often include strict notice and filing requirements, potential claimants should consult with experienced local counsel at their earliest opportunity to ensure their eligibility and compliance with the statutory requirements.

10.7.5. Miller Act Subcontractors and suppliers should be familiar with the Miller Act, which requires contractors on federal projects to post a surety bond to

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guarantee payment to all persons supplying labor and material to the contractor.18 The Miller Act protects subcontractors and suppliers because they have no lien rights on federal projects. Each state also has its own state-specific statutes, often known as a “Little Miller Act,” which provide similar protections for unpaid claimants that furnished labor, materials, and equipment to state and local public projects. A subcontractor’s recovery under the Miller Act (or state equivalent) can include many different types of damages, including delay damages. As an example, one district court ruled that “under the Miller Act, a subcontractor may recover from the prime contractor’s surety for delay costs for labor or materials furnished and used in the prosecution of the contracted work, where the subcontractor did not cause or contribute to the delay.”19 The court noted that whether the government or the general contractor was responsible for the delay was inconsequential. The court also noted that whether the costs expended were part of the original contract or for changed work did not matter; if the costs for labor and material were in fact expended, then the surety is liable (if the general contractor does not pay).

10.7.6. Other Remedies Available to Unpaid Subcontractors and Suppliers Subcontractors and suppliers on state and federal contracts may have additional remedies in the event of nonpayment under the federal Prompt Payment Act and analogous state statutes. On federal contracts, Section 52.232-27(c) of the FAR requires general contractors to include several mandatory payments provisions, including (1) a provision obligating the contractor to make payment to the subcontractor within seven days of receipt of payment from the government, (2) an interest penalty clause for any late payments, and (3) a flow-down clause requiring subcontractors to include the same payment provisions in their lowertier subcontracts. This section has two important limitations. First, a contractor may withhold an amount for retainage per the terms of its subcontract.20 Second, a contractor may withhold amounts pursuant to other applicable terms of its subcontract, provided that the contractor first notifies the subcontractor and the contracting officer of the basis for its withholding.21 Nearly every state has also enacted analogous prompt payment requirements that require general contractors to pay their subcontractors

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promptly on public projects. Several states have enacted prompt payment protections for subcontractors on both public and private projects.22 Several states have also enacted trust fund statutes intended to provide additional remedies to unpaid subcontractors and suppliers. For example, the Maryland construction trust fund statute provides that a contractor and its officers, directors, and managing agents can be held liable for knowingly retaining funds that were paid in trust for the benefit of subcontractors.23 Under the Maryland statute, a contractor and its officers, directors, and managing agents who have direction over or control of money paid for the benefit of subcontractors are deemed to be trustees of funds paid for work done by a subcontractor or supplier.24 The statute also imposes similar trust obligations on subcontractors vis-à-vis funds paid for the benefit of their lower-tier subcontractors and suppliers.25 While the Maryland statute does not require proof of any specific intent to defraud, courts have declined to impose liability in the absence of evidence of fraud, misappropriation, or other proof that a contractor’s managing agent knowingly retained trust funds earmarked for subcontractors.26 Even with such limitations, construction trust fund statutes provide important protections for the payment of subcontractors.

10.7.7. Mediation and Arbitration of Subcontractor Disputes Many subcontracts include provisions that require mediation or arbitration of subcontractor disputes. State and federal courts have repeatedly expressed a liberal public policy that favors the enforcement of private dispute mechanisms.27 Arbitration provisions are routinely enforced according to their plain terms, provided that the underlying contract containing the arbitration provision is valid and enforceable.28 Courts have also enforced arbitration provisions that allow one party (usually the general contractor) to unilaterally elect between arbitration and litigation.29 In addition, courts typically enforce provisions that allow one party to consolidate claims among multiple parties into a single arbitration. At least one court ordered the consolidation of the claims of an owner, general contractor, and subcontractor into a single arbitration, even though the arbitration agreements were included in separate contracts and did not specifically allow for consolidation.30

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The court reasoned that consolidation of multiple arbitrations involving common questions of fact and law promoted efficiency and avoided the risk of potentially inconsistent results.31

10.8. Subcontractor Licensing Contractors and subcontractors should be aware of the licensing requirements that apply to subcontracted work. Most states require both contractors and subcontractors to obtain a proper license applicable to their trade. The ramifications for failing to obtain or maintain the proper licensing can be substantial. In addition to facing potential criminal penalties, an unlicensed contractor may be barred from enforcing its contract in court.32 In addition, a general contractor may be held responsible for using unlicensed subcontractors, particularly if the contractor knew or should have known that a subcontractor was not properly licensed.33

10.9. Subcontractor-Specific Claims Publications While the information contained in this book applies to subcontractors and general contractors alike, subcontractors are urged to check with their trade associations for resources specific to their needs. Examples of some useful publications include the following from the National Electrical Contractors Association (NECA) Guide to Electrical Contractors Claims Management (Vols. 1, 2, and 3) and Negotiating Loss of Labor Efficiency Claims for Electrical Contractors,34 and from the Mechanical Contractors Association of America (MCAA) Change Orders, Productivity, Overtime.35

10.10. ConsensusDocs Standard Form Subcontracts The ConsensusDocs standard subcontract form reflects the growing trend toward fostering collaboration through more balanced contract terms. ConsensusDocs is a coalition of associations representing diverse

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interests in the design and construction industry, including many subcontractor associations, that works collaboratively to develop standard form construction contract documents that advance the construction process.36 One of the coalition’s stated purposes is to ensure that contracts serve the best interests of the project and the industry. The current version of the 700 series of ConsensusDocs forms was developed in 2011 and revised in 2014. The 700 series of ConsensusDocs forms includes several standard subcontract forms that may be of interest to subcontractors, including • Form 750—Standard Agreement Between Constructor and Subcontractor, • Form 751—Standard Agreement Between Constructor and Subcontractor (Short Form), • Form 752—Standard Subcontract Agreement for Use on Federal Projects, and • Form 725—Standard Agreement Between Subcontractor and Subsubcontractor.

The 400 series of ConsensusDocs forms also includes several standard subcontract forms, including Form 450—Standard Agreement Between Design-Builder and Subcontractor. While it is beyond the scope of this book to evaluate these subcontracts in detail, the ConsensusDocs form subcontracts encompass several of the principles of risk management outlined in this chapter. For example, ConsensusDocs Form 750—Standard Agreement Between Constructor and Subcontractor addresses project scheduling and delays (Article 5), changes (Article 7), payment (Article 8), and dispute resolution (Article 11) in a manner that fairly allocates risk between the contractor and subcontractor.

10.11. Conclusion This chapter has said much about the importance of proper risk management by contractors and subcontractors. This cannot be accomplished without clear communication and constant coordination, both of which are vital to maintaining good contractor-subcontractor relations. This cannot be overemphasized. Cooperation and good relations

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will help the contractor and subcontractor reduce the number of overall job problems and increase the chances of success for the project. Formal industry efforts, such as the use of fairer subcontract agreements described in this chapter and the implementation of partnering (discussed in Chapter 13) are welcome actions for improvement of contractorsubcontractor relations.

Endnotes 1. J. J. Brown Co. v. J. L. Simmons Co., 2 Ill.. App. 2d. 132, 118 N.W. 2d 781 (1954); see also U.S. Industries, Inc. v. Blake Const. Co., Inc., 671 F.2d 539, 547 (D.C. Cir. 1982) (affirming award of disruption damages arising from contractor’s failure to properly schedule and coordinate the work); Unis v. JTS Constructors/Managers, Inc., 541 So.2d 278 (La.App. 1989) (contractor had an implied obligation to avoid hindering or delaying its subcontractors). 2. E.g., Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 724-26 (4th Cir. 2000) (holding that the prevention doctrine barred the general contractor from enforcing the pay-when-paid clause as a defense against the subcontractor’s extra work claim where the general contractor did not request additional costs from the owner). 3. Matter of Cohu, Inc., Comp. Gen. No. B-199551 (1982). 4. Appeal of R. R. Mongeau Engineers, Inc., ASBCA No. 29341 (April 14, 1987). 5. E. A. Berman Company v. City of Marlborough, 419 N.E.2nd 319 (Mass. App. 1981). 6. Matter of R. R. Mongeau Engineers, Inc., Comp. Gen. No. B-218356 (July 8, 1985). 7. Waldinger Corp. v. CRS Group Engineers, Inc., 775 F.2d 781 (7th Cir. 1985); Appeal of Bruce-Anderson, Co., Inc., ASBCA No. 29411 (Aug. 1, 1988). 8. E.g., Essex Electro Eng’rs., Inc. v. Danzig, 224 F.3d 1283 (Fed. Cir. 2000). 9. Id. 10. Severin v. U.S., 99 Ct. Cl. 435 (1943). 11. J. L. Simmons v. United States, 304 F.2d 886 (Ct. Cl. 1962). 12. E.g., Interstate Contracting Corp. v. City of Dallas, 135 S.W.3d 605 (Tex. 2004); but see Federal Deposit Insurance Corporation v. Peabody, N.E., Inc., 680 A.3d 1321 (Conn. 1996) (rejecting a pass-through claim against the state on sovereign immunity grounds). 13. E.g., Turner and Transamerica v. United States, 973 F.2d 1572 (Fed. Cir. 1992). 14. E.g., Universal Concrete Products v. Turner Const. Co., 595 F.3d 527 (4th Cir. 2010). (enforcing unambiguous pay-when-paid provision under Virginia law); BMD Contrs., Inc. v. Fid. & Deposit Co., 828 F. Supp. 2d 978 (S.D. Ind. 2011) (differentiating between pay-if-paid and pay-when-paid clauses and enforcing pay-if-paid provision). But see OBS Co., Inc. v. Pace Const. Corp., 558 So.2d 404 (Fla. 1990) (refusing to enforce pay-if-paid provision based upon ambiguity where the subcontract incorporated the prime contract, which required general contractor to certify that it had paid all subcontractors as a condition precedent to obtaining final payment from owner).

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15. E.g., Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 724-25 (4th Cir. Va. 2000) (applying “prevention doctrine” to bar general contractor’s enforcement of a pay-if-paid clause). 16. E.g., Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal.4th 882 (1997) (holding that pay-if-paid provision violated California’s public policy based upon California statute barring the enforcement of mechanic’s lien waivers in most circumstances). 17. Compare D.C. Code § 40-303.01 (providing lien rights to “[a]ny person directly employed by a contractor : : : whether the person is a subcontractor, materialman, or laborer : : : ” on any property subject to lien) with Va. Code Ann. § 43-3 (providing lien rights to “[a]ll persons performing labor or furnishing materials of the value of $150 or more, including the reasonable rental or use value of equipment” on any property subject to lien). 18. See 40 U.S.C. §§ 3133, et seq. 19. U.S. for the Use &Benefit of Leonardo Mariana v. Piracci Construction Co., Inc., 405 F. Supp. 904 (District of Columbia, 1975); also see U.S. for the Use and Benefit of Superior Insulation Co., Inc. v. Robert E. McKee, Inc., 702 F.Supp. 1298 (N.D.Tex. 1988) (subcontractor recovered delay damages from Miller Act payment surety where the damages were characterized as the increased cost of labor and material furnished to the project). 20. See FAR 52.232-27(d)(1). 21. FAR 52.232-27(d)(2)-(3),(e). 22. E.g., 62 Pa. C.S.A. § 3931 et seq. (Pennsylvania’s Prompt Payment Act, applicable to public projects); 73 P.S. § 501, et seq. (Pennsylvania’s Contractor and Subcontractor Payment Act, applicable to private projects). 23. Md. Code Ann., Real Prop., §§ 9-201 - 9-204. 24. Id., § 9-201. 25. Id. 26. Selby v. Williams Constr. Svcs., 948 A.2d 132, 138-39 (Md. Ct. Spec. App. 2007). 27. E.g., CompuCredit Corp. v. Greenwood, 132 S. Ct. 665 (U.S. 2012). 28. Id. 29. E.g., Chapman-Martin Excavating & Grading, Inc. v. Hinkle Contr. Co., LLC, 2011 U.S. Dist. LEXIS 138226 (S.D. W. Va. 2011) (“[a]rbitration clauses that provide for arbitration at the unilateral election of one party are common in construction contracts, and courts often enforce these provisions”). 30. Maxum Founds. v. Salus Corp., 817 F.2d 1086 (4th Cir. 1987). 31. Id. at 1087-88. 32. E.g., J. W. Woolard Mechanical & Plumbing, Inc. v. Jones Dev. Corp., 367 S.E.2d 501 (Va. 1988). 33. Hydrotech Systems, Ltd. v. Oasis Waterpark, 803 P.2d 370 (Cal. 1991). 34. National Electrical Contractors Association, Washington, DC, (301) 675–3110. 35. Mechanical Contractors Association of America, Inc., Rockville, MD, (301) 869–5800. 36. The ConsensusDocs coalition comprises more than 40 groups, including Air Conditioning Contractors of America (ACCA), American Institute of Constructors (AIC), American Society of Professional Estimators (ASPE), American Subcontractors Association, Inc. (ASA), Architectural Woodwork Institute

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(AWI), ASFE/The Geoprofessional Business Association, Associated Builders and Contractors, Inc. (ABC), Associated General Contractors of America (AGC), Associated Specialty Contractors, Inc. (ASC), Association for Facilities Engineering (AFE), Association of the Wall and Ceiling Industry (AWCI), Construction Financial Management Association (CFMA), Construction Industry Round Table (CIRT), Construction Owners Association of America (COAA), Construction Specifications Institute (CSI), The Construction Users Roundtable (CURT), Dispute Resolution Board Foundation (DRBF), Door and Hardware Institute (DHI), Finishing Contractors Association (FCA), Independent Electrical Contractors (IEC), Lean Construction Institute (LCI), Mechanical Contractors Association of America (MCAA), National Association of Construction Auditors (NACA), National Association of Electrical Distributors (NAED), National Association of State Facilities Administrators (NASFA), National Association of Surety Bond Producers (NASBP), National Association of Women in Construction (NAWIC), National Electrical Contractors Association (NECA), National Ground Water Association (NGWA), National Hispanic Construction Association (NHCA), National Insulation Association (NIA), National Roofing Contractors Association (NRCA), National Subcontractors Alliance (NSA), National Utility Contractors Association (NUCA), Painting and Decorating Contractors of America (PDCA), Plumbing Heating Cooling Contractors Association (PHCC), Sheet Metal and Air Conditioning Contractors' National Association (SMACNA), The Surety & Fidelity Association of America (SFAA), United States Hispanic Construction Association (USHCA), Women Construction Owners & Executives, USA (WCOE), Water and Wastewater Equipment Manufacturers Association (WWEMA).

Chapter 11

Pricing Construction Claims and Change Orders Donald Harringtona, R. Brent McSwainb, Rex Snyderc, and James L. Gilesd

11.1. Introduction The foundation of the construction process is the contract. The contract should describe in detail the scope of the contractor’s work, the amount of work to be performed, the schedule over which it will be performed, the conditions existing at the site, and the amount and method of payment. These key parameters are all subject to change during performance of the work as a result of changes or refinement in design, differing conditions at the site, or changes to the schedule of performance. Contractors expect both to perform changed or additional work and to receive appropriately adjusted compensation and schedule as a result of the changed and/or additional work through change orders issued by the owner. Claims result when the parties are unable to reach an agreement on price and/or time to perform extra work, including costs and time for delays, acceleration, and impact costs experienced on the project. A claim is the contractor or subcontractor’s substantive description and detail that supports the change in time and extra costs incurred, or to a

Vice President, Sage Consulting Group. Senior Consultant, Sage Consulting Group. c Senior Consultant, Sage Consulting Group. d Senior Consultant, Sage Consulting Group (deceased). b

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be incurred, due to changed or added work. In case of a dispute over the amount to be paid, the amount sought is often termed “damages.” The party paying for the added work, typically the owner or its representative (when a contractor initiates a claim) or a contractor (when a subcontractor initiates a claim), needs detailed schedule and cost analyses and discussions to understand, negotiate, and justify extra contract time and costs. Pricing of claims falls into two categories: forward pricing, where the price and time are negotiated before the work is done, and post pricing, where pricing and schedule adjustments are made during or after performance of the work. In applying either type, the pricing elements of the claim itself are the same and include the direct cost of performing the changed work, impact and/or delayed performance costs, indirect costs, and markups for overhead and profit. Many different methodologies have been used to successfully price claims. What is important is that the pricing elements are carefully calculated and substantiated. Forward pricing establishes a price before the work is done. The owner and contractor (or contractor and subcontractor) agree on the work to be performed, the amount of costs to be incurred, the time required to perform the changed work, and the amount to be paid. This requires the parties to agree to the price and time to perform the changed work. This is a practical approach and offers great advantages to both parties. The owner or contractor can negotiate a fair and reasonable price and time to perform the work before directing the work to be performed. The owner or contractor also knows the additional cost to be incurred because it has been fixed by the agreed-upon change. The contractor can logically integrate the changed work into the schedule, procure the required materials, and perform the work. Unfortunately, the pace of construction projects often prevents changes from being forward priced and agreement being reached prior to performing work. Post pricing is used to establish the price for changed and added work after performance of the work. Common post pricing methods are force account, or time and material, in which payment is based on records of actual work hours, materials, and equipment used. This method is most commonly used when an owner directs a contractor to make discrete changes during performance where the changed work can be segregated from the base contract work. Often, directly capturing the added cost is not possible, such as when the owner directs a pipe size to be increased from 6 in. to 10 in. in diameter, affecting multiple areas and trades throughout the project. Directly capturing the impact costs or

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labor inefficiency costs on unchanged but affected base contract work and the changed work is often difficult. These are the circumstances where disputes over the cost and time to perform changed work most often arise. One benefit to post pricing changes is that the actual increase in cost is known rather than estimated. However, post pricing as a result of a change directive typically requires the pricing to be reasonable.

11.2. Forward Pricing Many widely used standard form contracts provide for change orders to be agreed upon in writing before the work is performed. For example, AIA-A201 § 7.2.1 states A Change Order is a written instrument prepared by the Architect and signed by the Owner, Contractor and Architect stating their agreement upon all of the following: 1. The change in the Work; 2. The amount of the adjustment, if any, in the Contract Sum; and 3. The extent of the adjustment, if any, in the Contract Time.1

The AIA contract recognizes that change orders are often not agreed upon in advance of performing the work and provide for changed and added work to be unilaterally directed. In AIA-A201 § 7.3.1, the term for unilaterally directed work is a construction change directive, and the provision states A Construction Change Directive is a written order prepared by the Architect and signed by the Owner and Architect, directing a change in the Work prior to agreement on adjustment, if any, in the Contract Sum or Contract Time, or both. The Owner may by Construction Change Directive, without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted accordingly.2

Furthermore, AIA-A201 § 7.3.2 goes on to state, “A Construction Change Directive shall be used in the absence of total agreement on the terms of a Change Order.”3

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In the Modification Impact Evaluation Guide4 (although withdrawn by the Corps, the statements about forward pricing remain relevant), the U.S. Army Corps of Engineers emphasizes the importance of agreeing on price and time terms before allowing the contractor to proceed with modified or changed work. The guide states, “The attitude that the urgency for reaching a settlement no longer exists once the NTP [notice to proceed] has been issued is self-defeating. For many reasons, it is advantageous to the contractor to delay final settlement of all modifications until the work is finished.” The guide gives the following reasons a contractor would find delaying settlement of modified work until all of the work has been completed advantageous: • The contractor can be less cost-conscious in doing the work. • Some of the risks contractually assigned to the contractor are shifted to the Corps of Engineers. • The contractor will have actual cost data with which to confront the Corps of Engineers. (Actual cost data under this circumstance does not necessarily represent reasonable cost.)5

When a construction change directive is issued, the contractor must perform the work; the cost of that work will be determined at a later date. The contractor assumes that any and all costs it incurs will be compensable, while the owner will argue that not all costs were necessary or reasonable and/or some costs were excessive, thereby resulting in a dispute. The guide notes advantages of forward pricing but goes on to say that “[a] major benefit of settling modifications before performance is that it encourages prompt revision of the progress schedule, thus maintaining accurate knowledge of the sequencing of the remaining work, the final contract price, and the final completion date. The schedule then remains a realistic tool for determining the impact of changes on the contractor’s operations. An up-to-date CPM schedule is a prerequisite to forecasting the presence and extent of impact.”6 An updated current schedule also allows for independent analysis of future changes. Thus, the impact to the project of each change can be determined. However, although forward pricing has certain advantages, most changes are not settled in time to avoid impacts to the follow-on work. As a result, many forward-pricing proposals are withdrawn then resubmitted with actual costs because owners fail to approve the change in

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time to take advantage of the risk allocation inherent in the forwardpricing method.

11.2.1. Risk in Forward Pricing Because contractors bear most of the risks on a forward-pricing change, their approach to forward pricing is often conservative and pessimistic. Contractors often assume a worst-case scenario when estimating costs, with everything affected or potentially affected by the change included in the pricing, while owners are interested in obtaining the lowest price for the changed work. Owners rarely accept contingencies in price proposals. Sometimes, the owners/engineers do not fully inform the contractors of all cost implications a change order might have on the project. For instance, an owner may change equipment furnished, but fail to inform the contractor of a longer lead time to obtain the new equipment. Thus, the contractor is left to develop the full scope of required services to cover all unanticipated potential costs of the changed work. A change order price proposal should include everything, within reason, that the change could affect directly or indirectly. This includes schedule impacts and the effect on base contract work not directly changed but nevertheless made more difficult or costly to perform. The standard changes clause for government contracts and in many standard form contracts recognizes claims for impact on “unchanged” work. In estimating a new job, ideal conditions, worst conditions, or conditions somewhere in between can be assumed when preparing the bid. In forward pricing, more is known about the conditions in which the work will be performed; therefore, the cost proposal should include costs based on the actual conditions encountered or expected. These conditions should be documented as part of the cost proposal. The contractor’s estimate should define all probable risks and problems and base its pricing on those problems and risks that are more substantial and probable. Where substantial risks are identifiable, but unlikely and/or difficult to quantify, they should be explicitly excluded from the change proposal. In the event a change order seems likely to affect unchanged work but cannot be (1) discerned, (2) accurately estimated, or (3) negotiated, the contractor should expressly exclude those risks from its proposal and reserve the right to claim such cost and time extensions at a later date.

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This can be accomplished with language that allows the contractor to revisit those risks along with the associated pricing once the risk becomes known and/or easier to quantify based on additional knowledge gained as the project proceeds. One difficulty the contractor has in forwardpricing changes is identifying the impact a single specific change has on the project. A single specific change may have little or no impact on the project, but hundreds of changes can have a significant cumulative impact.

11.2.2. Use of Standard Formats When pricing change orders, using a template or standard format aids in preparing proposals and improving organization of records necessary to support pricing of the directed work. Such use also establishes the contractor’s line of thought for the ensuing negotiations. Because good preparation is the single most important item required for successful negotiations, well-organized proposals and supporting data are essential for establishing a strong bargaining position. A standard format for preparing proposals reduces the chances of duplications, omissions, and calculation errors. It also allows for adjustments to be easily made when computing alternate proposal methods. A standardized format also facilitates recalculation of proposal totals as adjustments are made. Knowing how adjustments of specific negotiated items are going to affect the total price is an important element of negotiations, and the quicker the owner and contractor can say yes or no to an adjustment, the quicker a settlement can be reached. Pricing of proposals is an art similar to estimating contracts, and one becomes more adept at pricing proposals with experience. Each change order may contain numerous unique variables, which means no single standard format or procedure exists for all changes because every project is unique. Standardized formats assist in maintaining consistency and integrity in data that is evident to both the contractor and the owner. Many contracts dictate the use of specified formats for change orders, and adherence to the specifications is advisable. Failure to abide by the terms of the contract and specifications can result in rejection of the entire proposal. AIA contracts specify not only documents for change orders but also specify forms to use when change orders are presented to the owner and/or architect. Contracts also contain very specific time requirements when submitting changes and/or claims. The contractor

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must include in the claim all pertinent data and calculations, then process the change within the contractually stipulated time limits. However, not clearly defining material, labor, or equipment costs in the standard format can lead to serious cost misunderstandings between the contractor and owner, thereby extending the overall time required to settle the claim.

11.2.3. Material Quantities and Prices Additional work is the most common reason to require additional material. A detailed material takeoff should support the quantity of additional material, and invoice or quote backup should support any increased costs. Increased material costs may result from various causes. Buying small amounts of additional material may result in higher unit costs for the additional materials. Increased costs also result from improperly specified materials (or defective specifications). A contractor would then submit material in compliance with the corrected specifications. The contractor should be able to recover the increased cost of the substituted material. More information on material claims can be found in Section 11.6. A contractor should weigh the same considerations as in the original bid regarding material takeoff and pricing when estimating material costs for change orders. Changes often involve small material quantity purchases with increased handling; as such, more attention should be paid to pricing to ensure all applicable costs are considered. Sources for material prices include quotations, published price lists, records, handbooks, and published indices. Factors to account for when pricing materials include • • • • • • • • • •

Purchasing practice—higher prices of a reliable supplier, Salvage value of job material and excess purchases, Greater cost of odd lot sizes, Quantity discounts not applicable or not able to be taken, Cash discounts not applicable or not able to be taken, Transportation and handling costs (special deliveries), Inspection and testing costs, Taxes and duties, Escalation, and Storage.

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The labor cost to perform the changed work and material installation depends upon the project-specific parameters. Pricing varies with the estimator’s experience, judgment, and use of differing general guidelines and estimating programs. Following a standardized process and format is important so that the owner is familiar with the estimating process. These are the reasons that the pricing of changed or additional work that is similar to other work generally has higher unit costs. The contractor must be prepared to justify higher unit costs for similar work to the owner.

11.3. Post Pricing In post pricing, the costs of performing the work should be known. The difficulty lies in identifying and isolating the changes and their associated costs, such as impact costs, from the costs of the base contract work. Even when the contractor has good cost records with adequate descriptions of work performed, discretely identifying and isolating all the costs associated with the changed and added work can be difficult.

11.3.1. Cost Analysis The contractor always has the burden of proving both the entitlement to and the amount of requested additional costs. Because of the nature of construction, precise measures of costs attributable to specific causes are often not possible. However, the inability to discretely calculate the amount being sought does not necessarily preclude recovery. This is not to say that having once established entitlement, recovery of damages will automatically result without precise costs. The contractor is obligated to provide the best evidence of damages possible under the circumstances, and good, detailed presentation of damages can frequently result in a greater recovery of the costs incurred. Conversely, the owner can produce a detailed rebuttal analysis of damages, which frequently results in a dramatic reduction in damages awarded. Damages claimed should be realistic and address all parameters of changed work and any unchanged work. It is possible that while the changed work resulted in schedule impacts, adjustments to the base contract or unchanged work compensated the contractor for the schedule impacts, ultimately resulting in little or no impact to the project

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schedule. Cost analysis can be used to estimate what the work should have cost, absent impacts. This analysis includes using actual costs and estimates of reasonable costs. Merely incurring costs is not an automatic precursor to recovery of those costs. The burden is on the contractor to provide accurate, concise, and contemporaneous records that show it was entitled to the costs and that the costs incurred were necessary and realistic.

11.3.2. Actual Costs Courts have shown a strong preference for the actual cost method of calculating damages.7 The U.S. Court of Claims stated in Bruce Construction Corp. v. United States, “As we have said above, there is a presumption that actual costs paid are reasonable. That presumption must be overcome by which every party alleges its unreasonableness.”8 In this method, the actual cost records of the contractor are used to “itemize and total the cost of each piece of equipment or material and each manhour necessitated by the [breach].”9 This method is also referred to as the “segregated” or “discrete” cost method. If the existence of the claim is known prior to completion of the job, arranging the contractor’s costaccounting system to allow for the immediate identification of damages may be possible. Every effort should be made to segregate the damages by issuing separate cost-accounting codes to track the labor and material for the changed work. However, this is often not possible. For example, when work is both added and deleted by a change, no actual cost record will exist for the deleted work. When separate cost codes are not established, the changed work labor and material are comingled with the base work labor and material, making the separation of costs difficult without signed time tickets, invoices, or some methodology to identify the changed work discretely. If the changed work was highly inefficient, and no separate cost codes or tickets were produced, an accurate accounting of the work hours cannot be determined. The change may not affect an item of work completely from beginning to end by the change. An item of work may begin as planned, only to undergo differing site conditions or other disrupting events with an adverse effect on the labor hours to complete the remainder of the operation. The actual unit prices for the work before or after an impact period can be analyzed to identify what the contractor will experience to complete the operation. The process of identifying a period of unaffected

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work to serve as a baseline is known as the “measured mile” approach. Establishing an area of work that is unaffected requires detailed accounting of installed units and actual work hours in a specific job area. Once an unaffected area is determined, the unaffected productivity rate (work hours/units) can be compared with the affected productivity rate to calculate the increased work hours required to finish the remaining work. The increased rate would then be applied to all remaining units to install if those areas are also affected. An unaffected portion of work of significant duration and similarity to the affected work area may not exist, rendering this approach difficult to implement and support. Chapter 9 also discusses the “measured mile” approach on the impact on labor productivity from claims and change orders. The impact and cost associated with labor learning curves should also be considered as part of the affected work. However, if actual costs were utilized by default, any learning curve impact would already be included in the costs.

11.3.3. Reasonable Costs Developed from Existing Job Data How detailed and elaborate the cost-accounting records are is often a function of the size of the project and the size of the contractor. The level of sophistication of contractors’ cost-accounting records varies significantly. However, most construction project documentation will include some or all of the following categories of documents: • Original estimate: The contractor will generally have prepared an original estimate or budget prior to submitting a bid or proposal for the project. These estimates are typically broken down into various accounts or cost codes that reflect the work to be performed. Within the various accounts, numerous subaccounts can be included, depending on the level of detail the contractor desires. • Cost reports: One of the most important categories of documents is the contractor’s cost reports reflecting actual costs incurred in performing the work. In reviewing cost reports, there are generally two types of reports to examine. One is an overall project cost report, frequently called a “job cost report,” “work-in-progress report,” or “job status report.” This report shows all incurred costs on a job, such as labor, material, and equipment, arranged by cost code or account. The second type of report is a labor-only report,

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•

•

•

•

•

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focusing on labor expenditures by cost code or account. Such reports frequently give work hour data, hourly cost data, and unit cost data. Both types of reports are normally available in summary and detail formats. Labor records: Labor cost is often the largest variable cost a contractor incurs and is a frequent source of damage claims. Labor records include documentation such as timesheets, overtime reports, and cost records. Quantities: The anticipated quantities of work to be performed are usually included in the initial estimate. Most estimates include a quantity takeoff, which is the count or measure of the quantity of material required along with the labor required to install those materials. These quantity surveys provide a window into the thought process of converting the plans to estimated cost of performance. These quantities should be compared with the actual quantities of work performed to determine whether cost overruns or underruns are related to quantity differences. Schedules: Schedules are key in analyzing delay and acceleration claims and usually have relevant information regardless of the type of claim. The original schedule is typically updated on a regular basis, generally monthly. The updated schedules are important to any delay or acceleration claim, as critical path impacts on a monthly basis can be identified. Pay applications: Pay applications can be a source of information on the quantity of work performed, allowing for an analysis of the amount of work performed by period and type, particularly for unit price contracts. Pay applications can be used to identify an earned cost as compared with an actual cost per pay period. Changes estimates: When the owner directs a change in work, the contractor is generally requested to submit an estimate of the increased or decreased costs and time resulting from the change. In performing a claim analysis, revisions to the budget in the cost report should be reconciled with approved change orders. As an example, if an additional 500 work hours are added, the budgeted work hours should reflect an increase of 500 work hours as compared with the actual work hours expended for the same work item. Daily logs and reports: The daily logs or daily reports of the prime contractor and subcontractor provide a contemporaneous view of what work was being performed and any problems encountered.

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The architect, engineer, and the owner’s representatives may also maintain periodic reports. Daily logs and periodic reports can provide insight into what actually occurred on the project on a day-to-day basis, and in some occasions why specific events occurred, or when and how much added equipment was used in a specific time period. Often, the daily logs and/or reports are the best source of contemporaneous project information to confirm extra costs claimed. • Productivity reports: For self-performed work, a daily or weekly record is kept, showing installed units and work hours for each labor cost code, as compared with the estimated productivity rate for the same work item. These reports reflect when productivity problems occurred and, if properly developed, document the causes of poor productivity. • Photographs: Date-stamped photographs or videos are excellent ways to record actual conditions or components of the changed work. • Unit cost reports: Unit costs pulled from a computer report alone cannot be expected to prove factual evidence of cost. Unit costs vary widely, depending on quantities recorded, material purchases made (and recorded), size of crews used, and types of equipment deployed for a particular period. Many other project documents are available that will assist in assembling cost data, including subcontracts, purchase orders, invoices, e-mail correspondence, etc. The greater the detail and accuracy of the records, the greater are the ability to analyze the cost accurately and the ability to recover damages. To the extent possible, the actual cost method should be used. Even if actual cost analysis is not applicable to all elements of the claim, the more elements to which it is applied, the better the overall analysis. Providing many different line-item calculations rather than a single damage calculation improves the presentation of the claim, shows precisely where losses occurred, and allows for a more detailed entitlement analysis. When detailed cost records exist, whether they are segregated for the claim or not, a line-by-line analysis of the cost records must be performed. During the first review of the records, every item with a significant variance, either overrun or underrun, should be identified and the causes of these variances determined. Focusing only on the overruns can be a mistake; sometimes underruns are equally

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informative. Examining the reasons for underruns can avoid making unjustified claims for large labor overruns that actually resulted from the contractor’s performance in lieu of subcontracting certain items.10 Costs should be explored to determine whether certain correlations exist. As an example, if an excavation contractor has significant labor overruns, corresponding overruns in equipment costs should be present. If those overruns do not exist, closer scrutiny is required because the equipment and labor costs should move in parallel. Not fully understanding the reasons for cost underruns and overruns can be fatal to an otherwise valid claim. The coding of the actual work must also follow the same process as the original estimate. For instance, if the estimate and budget segregates drywall installation between walls and ceilings, but the contemporaneous tracking or coding does not, this can lead to the appearance of overruns or underruns. When using the actual cost method, demonstrating the actual costs using the claimant’s accounting records is necessary. Tying the claims for damages being asserted to the contractor’s cost-accounting records is important. A contractor’s claims for productivity losses may be denied because the contractor failed to document the costs on days when actual impacts occurred, what work was performed on those days, and what work hours were expended.11 The project documentation and cost records must be kept so as to sufficiently support the claimed amounts. Ideally, the project documentation and cost records will supplement each other. In some claims, law or contract mandates the use of actual costs. For example, in termination for convenience cases, many contracts require that the contractor be compensated based on actual costs expended.12 If so, then cost accounting records will need to be produced. Failure to accurately track costs can lead to a contractor failing to obtain compensation for legitimate costs incurred.

11.3.4. Reasonable Cost Estimation One approach often used in construction claims is to estimate the amount of damages. Contractors are often able to estimate damages with some degree of accuracy. Determining damages by estimating is not unreasonable, because contractors survive economically by accurately estimating the cost of projects prior to construction. If enough discrete items are known, then reasonable assumptions can be made and reasonably accurate estimates of damage costs can be calculated.

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Under the estimated cost method, the claimant may furnish a wide variety of data, including estimates by contractor personnel, calculations by expert witnesses, cost data, and accounting records, as support for the reasonable value for the damages. The assumptions used to estimate the damages must be carefully examined. Frequently, slight variations in assumptions can produce significant variations in the outcome. Varying the productivity rate by an incremental amount can result in huge variances for large quantities of work such as piping, earthwork, or paving. Varying the assumptions to analyze the effect on calculations is often useful. This can avoid surprises later, such as discovering that a slight change in assumption eliminates all damages. When using this method, being cognizant of other projects performed by the contractor with similar problems or similar design or use is necessary so that comparisons between the projects can be made. Many contractors maintain histories of their projects that allow such cost comparisons. Historical information on prior projects must be examined so that the validity of the contractor’s estimate can be analyzed accordingly. Most contractors would testify that they base their estimates largely on their prior history on similar types of work. As a result, their cost performance on earlier projects is often relevant and extremely useful in either verifying or attacking the accuracy of the estimate. Past work of similar nature can be utilized as a “measured mile” if no unaffected work area exists on the current project.

11.4. The Proposal—Request for Equitable Adjustment 11.4.1. General Pricing Philosophy Claims typically begin with the submission of a change order proposal or a request for equitable adjustment (REA). In pricing claims, the contractor is advised to keep in mind the goal of maintaining credibility with the owner. Pricing data should be clear, accurate, and concise. Proposals should be sufficient in detail to permit an analysis of all material, labor, equipment, subcontracts, overhead costs, general condition costs, and profit. The proposal should cover all work involved in the modification, whether such work was deleted, added, or changed. The contractor should strive to have the proposal prepared in an orderly, clear, concise,

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and contractually accurate manner to minimize analysis delays and to prevent unnecessary misinterpretations of the claim documents. Nothing is more counterproductive and disheartening than to invest a significant amount of time, money, and effort in a claim, only to have it rejected or returned because it is incorrect or unacceptable for analysis. Conversely, including unnecessary documentation in an effort to bolster your claim is also counterproductive; only documentation that is pertinent to the claim should be submitted. In government contracts, the best opportunity to settle disputed claims is with the contracting officer. The claim should be fully documented and cite relevant regulations and case law. It should be presented to the contracting officer as if he or she knew nothing about the cause of the claim because persons unfamiliar with the case may review the claim or it may ultimately end up in litigation. The supporting data should be complete so the contracting officer is able to justify to any superiors that an equitable adjustment would be fair and reasonable. A thorough and complete claim document is absolutely essential, not only to support the validity of the claim but also to demonstrate at first glance that it is well prepared.

11.4.2. Unit Price Contract Considerations Unit price contracts are based in whole, or in large part, on unit prices, frequently with estimated quantities of each unit.13 Contracts for heavy and civil construction, particularly highway and utility work, are often put out for bid and priced using a schedule of unit prices and estimated quantities. Even lump-sum contracts may contain some items that are based on unit prices. Issues often arise when the estimated quantities in the contract vary significantly from the actual quantities performed. A body of law has developed to determine when the owner or the contractor is entitled to a price adjustment under these circumstances, depending on whether the contract contains a variation in quantity provision concerning such price adjustments or if it is silent on the issue. If work or material is contracted on a unit-price basis, a given unit is established (such as 1 cu yd of dirt) and a price is set for each unit (e.g., $2.40 per cu yd). The bid and contract price are based on an estimated number of units generally determined by the project owner (or by the engineer on the owner’s behalf). Quantity estimates in a unit price contract do not constitute guarantees of the minimum quantities of work

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without specific contract language to that effect. The overall bid price is based on the total of the estimated quantity multiplied by the unit price. Each unit price must contain the variable costs for performing a unit of work and a share of the contractor’s nonspecific costs, such as general condition costs, overhead, and profit. What is included and not included within a specific unit can become a matter of extreme importance when significant changes occur in either the quantities or in the means, methods, or manner of performance. The determination of how units are to be calculated for the purpose of payment is extremely important in unit-price contracts. Disagreements over the measurement of units are not uncommon. The contractor will likely be held to the prescribed unit price unless the contract specifically sets forth different unit prices for different quantities of work or materials. Absent a contract provision allowing the unit prices to be renegotiated for quantity changes, the general rule is that a contractor or an owner cannot require a unit price to be renegotiated simply because of a quantity change. In certain cases, an increase in quantity may be so substantial and unforeseeable that it becomes a “qualitative” increase for which the contractor may seek additional compensation. A qualitative increase occurs when it is of such magnitude that it was not reasonably contemplated by the parties.14 Generally, lump-sum contracts may not be adjusted by unit costs for changes in quantity unless permitted by a specific contract provision. Many contracts contain provisions that specify under what, if any, circumstances a party can seek an adjustment in the unit price of work or material. If the contract specifically provides that a change in quantity will not result in a change of unit price, neither the owner nor the contractor is entitled to an adjustment in the unit price when the quantity increases or decreases. Many form contracts contain provisions governing change in quantity. For example, AIA-A201, Standard General Conditions, contains the following provision: 7.3.4. If unit prices are stated in the Contract Documents or subsequently agreed upon, and if quantities originally contemplated are so changed in a proposed Change Order or Construction Change Directive that application of such unit prices to quantities of Work proposed will cause substantial inequity to the Owner or Contractor, the applicable unit prices shall be equitably adjusted.15

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However, what constitutes a substantial inequity is not strictly defined, which can lead to further disagreements between the owner and contractor. Some contracts contain clauses that specify that an adjustment in unit price will be permitted if the actual quantities vary by more than a certain percentage of the estimates quantities. These provisions are known as variation in estimated quantities (VEQ) clauses and are common in government road-construction contracts. The existence of a VEQ clause generally reduces the number of disputes that arise concerning variations in quantity. However, even with a VEQ clause, recovery may be denied if the increased cost of performing the additional units was not caused by the variation in quantity. Some courts have held that if a quantity variation does not come within the purview of a VEQ clause, an appropriate adjustment can be made under the differing site conditions or changed conditions clause of the contract. The differing site condition clause may apply rather than the VEQ clause in cases where the cost of additional units varies greatly from the contract price, no matter the reason for the increase.

11.4.3. Pricing Elements and Details The basic elements of the change order/claim proposal include • Summary ○ Entitlement ○ Amount of request ○ Time extension ○ Parties involved in the claim ○ Reference to contract clauses and/or contract disputes act • Narrative ○ Growth in cost amount ○ Growth in time ○ Facts ○ Entitlement • Schedule analysis, if applicable ○ Time impact analysis, as-planned vs. as-built, windows analysis • Pricing ○ Direct costs

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○

○

▪ Labor (including all burdens) ▪ Supervision ▪ Owned and rented equipment ▪ Permanent materials ▪ Job materials Impact costs ▪ Impact on other activities ▪ Delay costs (standby time, escalation) ▪ Acceleration costs (overtime and premium hours, disruption) ▪ Lost profit ▪ Lost productivity costs (disruption) ▪ Lost overhead Mark-up ▪ Jobsite overhead ▪ Home office overhead ▪ Profit ▪ Bond ▪ Insurance

The proper measure of an equitable adjustment for changed or added work is the additional costs incurred by the contractor. However, those additional costs must be reasonable.16 Using actual cost reports, actual labor, material, and equipment rates assist in determining whether or not the costs claimed are reasonable. In forward pricing, the most convenient and acceptable method of pricing is to estimate production rates for the changed work, show crew compositions and expected crew hours required to perform the changed work, and determine the type of equipment and equipment hours needed to support the crews. Material costs should be listed separately and substantiated with quotes, invoices, or price lists. For post pricing, names and dates of laborers and equipment should be listed, summarized, and submitted along with the rate and hours expended. Copies of time cards are usually not required, so long as they are available for verification. On force-account change orders, the work is commonly documented and verified daily by both the owner and the contractor. On large projects, a contractor may claim it had to perform force-account work but no owner’s agent could be located to substantiate the need or costs incurred for the alleged work. A contractor should be cautious in performing additional work that is not approved. Where possible, preagreed equipment rates, unit costs, and/or crew rates

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should be established early in the project. In many cases, equipment rates and labor rates are stipulated in the contract documents. This will expedite the negotiation and processing of individual changes. To price the added labor, equipment, and material costs for changed work, whether forward or post pricing, one or more of the following methods can be used, depending on the applicable contract provisions:17 • Unit prices in the contract subject to any variation in estimated quantities clause. The calculation of recoverable costs under a VEQ clause depends on the specific terms of the contract to allow an adjustment in unit price if the actual quantities vary by more than a certain percentage of the estimated quantities. • Unit costs from standard estimating manuals, such as those prepared by R.S. Means, the National Electrical Contractors Association, the Mechanical Contractors Association of America, Craftsman Publishing, or other estimating services.18 Disagreements on estimated costs often arise as to the scope and quantity of work estimated; how credits or deductions are priced; and the method of applying markups to labor hours, materials, and subcontracts. For contractor-owned equipment, average rates can be found in industry guides and construction rate schedules. • Subcontractor or supplier quotations. • Contractor’s estimated costs based on judgment, prior history, job history, or some combination of the three. • Contractor’s actual, total, or modified total costs. Use of the total cost or modified total cost approach is not a generally accepted methodology by many courts, and while it may have great appeal to the contractor, it should be used carefully and with much consideration.

11.4.4. Production Rates Change orders often affect the productivity rate at which the changed work can be performed and the productivity rate of the unchanged work. In computing production rates for prospective changes and to establish a reasonable cost, considering all factors that could increase or decrease the computed production rate is important. The size of the crews and the production rates are the two most important items affecting the value of work to be performed. The Construction Contract Negotiation Guide recommends including all possible factors that will influence production rates, including

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Relative experience, capability, and morale of workers; Size and complexity of the job; Climatic and topographic conditions; Degree of mechanization; Quality of job supervision; Existing labor-management agreements and/or trade practices; and Learning curve, which is a function of size, type of work, interruptions, and lack of repetitive tasks.19

The guide discusses the complex interplay of factors affecting work rates, tends to produce more than the usual amount of doubt and disagreement, and increases the danger of substantial contingency allowances. The Mechanical Contractors Association of America identifies 16 factors to consider when pricing changes and assigns a degree of impact for minor, average, and severe conditions. To offset the advantage that uncertainty always gives the contractor, the negotiator must bring analytical skills and experience to bear on the work rate problem. This is particularly important because contractor-subcontractor direct labor is commonly the single largest dollar item in construction. Thus, a somewhat small “cushion” in a contractor’s work rate estimate, perhaps as small as 2% of the total estimate cost, may double or even triple the contractor’s profit margin.20 Whether calculating damages for claims or negotiating potential settlement of claims, recognizing that a contractor can have profit built into unit costs that is over and above that amount specifically shown in a change order is important. The supporting documentation must be carefully analyzed to ensure that a contractor has not included profit margins in excess of those that may be allowed by contract by including profit in multiple cost categories. The contractor is entitled to fair compensation for the changed work, but it is not entitled to compensation for errors in its original bid. And while the contractor is certainly entitled to a profit, it is not entitled to a windfall as a result of changed work.

11.5. Impact and Inefficiency Costs 11.5.1. How Impact Costs Are Incurred Under the changes clause of the contract, the cost of performing unchanged work can be included in the equitable adjustment only if the

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performance of the change affects such cost. “If so, those increased costs of performing the unchanged work which are directly attributable to and which flow from the change are properly compensable under the change order.”21 Examples of impacts on unchanged work due to a change order are • • • • • • •

Changes in sequence of work; Changes in the manner and method planned to do the work; Use of different types, sizes, and quantities of equipment; Disruption to planned continuity of work; Additional mobilizations and demobilizations; Increased congestion of work areas (overcrowding); Inefficiency incurred during winter work resulting from schedule changes in changed work; • Overtime or premium time incurred to overcome delays caused by the above; and • Additional supervision to manage the changed work.

11.5.2. Specific, Identifiable Extra Work To calculate the effect of changes on unchanged work, showing specifically what increased costs were incurred or showing what the actual cost was compared with what the work would have cost without the change order is necessary. With smaller change orders, showing the added cost of an item of work is much easier. For example, the cost increase is somewhat easy to show if an item took three shifts to complete where it normally would have taken two shifts or if a larger crane was needed to perform the change order work and the same larger and more expensive crane was used to also perform the contract work. In such cases, it is simply a matter of computing the additional hours of equipment and labor used or planned for and the additional materials that were required. With larger delay, disruption, or acceleration claims, the pricing of impact becomes more complex.

11.5.3. Pricing Inefficiency and Loss of Productivity Unfortunately, most impact costs are not as easily identified and quantified. With the correct analysis, inefficiency and lost productivity costs can often be identified and directly traced to the changes performed in a certain time period. Lost productivity is an increase in the number of

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work hours required per unit of work or a decrease in the number of units being performed per work-hour. In lost productivity claims, the focus is on the difference between the affected productivity rate and the unaffected, or planned, productivity rate. The unaffected rate should be for an unaffected period of actual work on the project. If all work was affected, the actual productivity rate is compared with the planned productivity rate to calculate the added work hours, assuming support shows the planned production rate was reasonable. An alternate method would be to compare the total budgeted hours for a specific work item to the actual hours spent. Using the earned work hours for work performed over long periods of time allows for the determination of lost productivity, even for discrete time periods. In addition, standard industry rates can be used to substantiate and supplement calculated factors. Productivity analysis is a three-step process consisting of (1) quantifying the overruns and underruns that occurred; (2) determining the cause(s) of the overruns and underruns; and (3) calculating the actual productivity loss (if any), using the difference in productivity rates.22 In quantifying the overruns and underruns on the project, comparing the actual costs, work hours, and units to those in the adjusted budget is important to account for changes. The general calculation for quantifying the cost of lost productivity is Work hours in affected Work hours in unaffected area or time frame area or time frame − Units Units 

Work hours Work hours − Planned OR = Actual Units Units
 Unproductive work hours Total unproductive = × ðUnitsÞ per unit work hours

Unproductive work = hours per unit

Cost of lost labor = productivity




Total unproductive work hours

 × ðHourly labor costÞ

Disruption Disruptions in the work being performed or acceleration of the work generally causes lost productivity. Some of the major causes of disruptions are

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Changes, Adverse weather, Workforce size and shift work, Trade stacking and overcrowding, Change in sequence, Overtime, Restricted site access, Stop work order, Experience/learning curves, Delayed shop drawing review, and Changes to means and methods.

Disruptions often affect both productivity and time of performance and often occur on projects where delays have extended the duration of the work. Studies indicate disruptions in excess of 1 per 100 hours can cause significant productivity losses.23 Studies also show changes that result in disruptions in the last quarter of the project are six times more expensive than changes during the first quarter of work. The later that changes occur in the project, the less time is available to mitigate the effects of those changes and resulting impacts. Acceleration Acceleration occurs when the contractor is required to complete some or all of the work within a shorter duration of time than reasonably planned. Acceleration often results from delays early in a project or to complete more work resulting from change directives of the same duration as originally contemplated in the original contract. Acceleration on a project generally leads to overcrowding and trade stacking, increased crew sizes, increased shift lengths, and working more days per week, all of which can result in inefficiencies and lost productivity, leading to increased costs. Where the owner directed the acceleration or was otherwise responsible for the events necessitating acceleration, the contractor should be able to recover the added costs incurred from accelerating the work. Contractors should be cautious about accelerating without written direction from the owner; Chapters 6 and 9 discuss this in more detail. Keep detailed reports and identify additional costs by using separate tracking numbers to gather those hours for pricing at a later date.

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Overcrowding and Trade Stacking Overcrowding is the simultaneous operation of several trades in the same area. Lowered productivity can result from having more workers than can function efficiently in a limited working space. A contractor seeking to prove lost productivity from overcrowding must demonstrate that (1) congestion or trade stacking was not originally contemplated, because the work was planned sequentially, (2) the overcrowding resulted from the owner’s actions, and (3) productivity losses resulted from the congestion. As an example, if an electrical item that takes three workers is shifted into a period of time where 15 workers are already performing their drywall and painting activities, a 20% crowding factor (3/15) has been incurred, affecting all 18 workers. The Size of Work Crews As more workers are added to the optimum crew size, contractors can expect diminished returns on each additional worker—each new worker will increase crew productivity less than the previously added worker. The optimum crew size for a project or activity represents a balance between an acceptable rate of progress and the maximum return from the labor dollars invested. Increasing crew size above optimum usually produces a higher rate of progress but at a higher unit cost. A contractor must show that the larger crew or shift work was not planned, that the owner caused the change that forced the increased crew size, and that actual productivity loss was incurred to recover under a productivity loss theory. Shift and/or Days and Hours Worked per Week Working more than eight hours per day or more than five days per week introduces premium pay rates for workers and results in efficiency losses. The efficiency losses result from a slower pace maintained by workers and fatigue from longer hours. Working sustained overtime of 50 hours per week for six weeks will result in a productivity loss of approximately 15%, and working 60 hours per week for six weeks will result in a productivity loss of approximately 28%. As noted in The Business Roundtable, “After five to six weeks of operations, there is a further drop in productivity, which levels out at a low point after nine to 12 weeks of sustained overtime operation.”24 Industry studies indicate

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that the productivity of laborers who work 50 hours per week for a period of 10 weeks can decrease by as much as 35% and that 60-hour work weeks over the same length of time can result in a decrease of labor productivity up to 45%.25 To recover damages, contractors must show actual productivity loss caused by the extended overtime. Various industry published standards can then support the actual productivity losses. Due to the diminishing rate of productivity over time, at some point of extended shift work and/or overtime work, the productivity actually becomes less than it would be if the hours were reduced.

11.6. Material Costs Material is “any substance specified for use in the construction of the project and its appurtenances.”26 Materials are the bricks, mortar, steel, paint, and fixtures brought to the site; assembled, they constitute the final structure. Materials can also include a subcategory of items known as components. Components are items that are physically incorporated into construction materials.27 For example, concrete is a material, and sand is a component of concrete. The distinction between materials and components is significant only for purposes of compliance with Buy American Act provisions in federal procurement contracts and for recovering the costs of taxes incurred by purchasing additional materials.28 A further distinction exists between materials and supplies. Supplies are items needed to perform the work but are not incorporated into the final physical structure. Supplies are “things other than labor, which are consumed in, but do not become a physical part of the structure and are distinguished from the materials used which are becoming a physical part of the structure.”29 Material cost claims can be divided into two categories: claims for additional material and claims for the escalated cost of material. For various reasons attributable to the owner, contractors may be forced to purchase materials that were unanticipated at the time of bidding. Also, contractors may be required to purchase materials at prices higher than anticipated. It is well recognized that contractors can recover the costs of additional material and escalated cost of materials.30 The cost of supplies incurred as a result of additional material requirements is also recoverable as an element of construction claims. Claims for additional or escalated material costs are somewhat uncommon because contractors

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can usually predict such costs well in advance of performance of the project. Claims for additional material may serve as a useful first test of the validity of a claim. Contractors should not take lightly the calculation and assertion of claims for costs associated with additional or escalated material costs. Escalated material and labor costs can easily be incurred when a project is delayed, pushing the time of performance into later time periods than anticipated. For example, if concrete was anticipated to be placed in a given year but was delayed to a following year, the material could easily increase in cost. Similarly, delaying labor into later time periods than anticipated could push the labor into new labor agreement periods with higher labor rates.

11.6.1. Reasons for Material Claims The three most common reasons for material claims are owner-caused delay,31 defective specifications,32 and owner-directed changes.33 In cases of owner-caused delay, contractors seek primarily to recover the escalated cost of the material. In times of inflation, delays in the progress of a job often result in an increase of the cost of material. The effect of inflation is particularly acute in the construction industry, where the cost of labor and materials escalate rapidly,34 and is particularly pronounced when the material is based on volatile commodities such as petroleum products.35 Claims for escalated material costs are not restricted to inflationary economic periods. Defective specifications require correction, and compliance with corrected specifications may result in the contractor substituting another material. However, substituting materials at no additional cost is often impossible. Contractors may be able to recover the increased cost of material substitutions in certain situations. In the absence of a contractual provision to the contrary, an owner implicitly warrants the sufficiency of its specifications.36 Contractors may recover the increased cost of performing in accordance with an owner’s defective plans and specifications. An example of this would be a specification with undersized or otherwise inadequately designed structural components. The substituted component will most likely be larger, stronger, and more costly than the deficient component called for by the specifications. The increased cost of the substituted component is a recoverable material cost in a construction claim. Another type of defective specification claim arises when the specifications require an item or material that is not available but the replacement material costs more. Increased material costs attributable to the

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unavailability of an item are recoverable.37 If a specification requires a manufacturer’s “standard product,” the owner is deemed to have implicitly warranted the product’s availability. Similarly, when an owner requires a specific “brand name” product, the risk of unavailability is on the owner, and the contractor is entitled to recover costs attributable to the unavailability of the product.38 If a specification calls for a general material and contains no other specific representation, the contractor typically bears the risk of the material’s unavailability and is not entitled to an equitable adjustment.39 However, material that is unavailable due to abnormal circumstances may result in cost or time adjustments to the contract. Examples of this are a concrete shortage due to the cement plant being unable to produce cement and drywall being unavailable because it was diverted to a different geographic area to address storm-related repairs. The contractor also assumes risk even when an owner specifies a subcontractor or sole-source supplier. If the contract requires a specific subcontractor, the risk of nonperformance remains with the contractor.40 However, an owner should carefully weigh the risks of specifying a specific subcontractor. If that subcontractor is incapable of or unable to perform the work, the burden may be on the owner. In some cases, subcontractors are required to have specific certifications to perform work. If the subcontractor is not certified or cannot obtain certification, the resulting impacts may be the owner’s responsibility. Similarly, when a sole source is designated, the owner implicitly warrants only that the specified source will be capable of supplying the required material.41 Also, when a unique material is specified, an implied warranty exists that the material will be available to accommodate the construction schedule. The contractor may be responsible to schedule its work to accommodate the material availability. An example of this is a grade of structural steel that is manufactured by the steel mill only once a year. However, the owner is not deemed to warrant that the supplier will actually perform or that it will adequately perform.42 Some courts have held, however, that the designation of a sole-source material supplier does warrant that the supplier will have material that is adequate in quality or quantity.43 Contractors should not limit claims solely to the increased cost of the material. Contractors should be aware that, along with the additional costs of the substituted items, they may also be able to recover for delay costs associated with complying with the defective specifications. Practically all construction contracts permit an owner to direct changes to the work while the work is in progress. Owner-directed changes may require the addition or deletion of a section of the structure

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or substitutions of more costly materials, or require the contractor to provide additional materials. Moreover, a change order may render previously purchased material unsuitable or unusable. Such material costs are recoverable elements of construction claims.

11.6.2. Other Costs Associated with Material Claims Contractors should be aware of costs other than the direct costs of the additional or escalated material. Although these expenses may be tangentially related to the actual cost of the material, such costs are recoverable and should be included in all construction claims. Contractors may recover costs associated with additional handling and processing of material that results from acts of the owner. These costs represent the additional labor costs involved in handling and refinishing the materials. Contractors may also be able to recover material storage costs that would not have been incurred but for the acts of the owner.44 On large projects, storage and handling costs may be excessive, and such costs should not be overlooked in calculating damage claims.45 A contractor may also be entitled to the cost of transporting additional or substituted material to a jobsite. In most cases, contractors are able to recover only the cost of the usual method of moving that type of material. Therefore, extraordinary transportation expenses are not recoverable unless required by the owner. Contractors should not limit their claim to the exact amount of the additional or substituted materials incorporated into the project. Invariably, material purchases are for a quantity greater than actually needed to account for spoilage and minor overruns. The Federal Acquisition Regulation (FAR) permits recovery of additional material costs for items not actually used on the project. Specifically, it states, “[i]n computing material costs, the contractor shall consider reasonable overruns, spoilage, or defective work (unless otherwise provided in any contract provision of the contract relating to inspecting and correcting of defective work).”46 A final cost related to material expenses is sales or use tax paid by contractors for the material used on a project. In private projects, contractors may recover excess sales and use taxes incurred as a part of an owner’s delay or change. Many public projects, however, are exempt from sales tax, and contractors may not recover this extra expense.47

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11.6.3. Additional Material Quantities and Cost Calculation Calculating additional material quantities is a fairly simple process because material quantities are easily identifiable. Maintaining accurate records facilitates establishing the quantity of additional material used on a project. In the absence of records or other supporting data, contractors may establish and calculate the quantity of additional materials by reference to the project’s drawings. The difference between the quantity of materials required by the original drawings and the quantities actually used on the project is the amount of additional materials that were required. If no drawings are available, the quantity of additional material may be determined by comparing the contractor’s original estimate for material with the actual quantity of material used. Purchase orders, delivery tickets, invoices, or other procurement documents must verify the quantity of material used. Any calculation of additional material quantities should also consider overrun, spoilage, and defective items. Before calculating additional material costs, contractors must consider whether they are seeking the cost of additional material, the cost of material escalation, or both. Although calculating the cost of additional material is somewhat simple, calculating the cost of material escalation can be problematic. To calculate the cost of additional material, the quantity of additional material is multiplied by the cost or unit price of the material.48 An invoice from the supplier and proof that it was paid are usually sufficient to establish the cost of the additional material. In many instances, segregating the cost of additional materials from the base contract materials is not possible. This is especially true of fungible items such as concrete or backfill. In these situations, a supplier’s invoice establishing the unit price for the material at the time the added work was performed is usually sufficient to establish the increased costs. In the absence of invoices, having the supplier testify or provide a price list for the applicable time period may be necessary to establish the contractor’s additional material costs. Material escalation costs may be calculated through the use of direct and indirect methods.49 The direct method compares the estimated cost of the material with the actual escalated cost of material as purchased. The difference between the cost of the material as originally estimated and the actual cost of the material is the amount of recoverable material escalation. Invoices are the best proof of the escalated cost of material. The indirect method is used when the contractor does not have invoices or other supporting data to establish the cost of the material. An example of an indirect method of calculation is found in George Hyman

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Construction Co.50 In this case, instead of offering the material costs estimated at the time of bidding, the contractor used indices published by Engineering News Record to establish material costs and “worked backward” to determine a deflated cost of material or purported what the material would have cost had the work been performed at the time originally planned.51 Under the indirect method, the escalated material cost is the difference between the deflated cost and the actual cost of materials. Trade journals other than the Engineering News Record may be used to determine escalated material costs. Certain mistakes are common in calculating and proving escalated material costs, regardless of which method is used. Often, contractors assume that delay automatically results in the escalation of material costs for which the owner is liable. Contractors may recover only the material escalation costs that result from owner-caused delay. Sometimes, contractors duplicate costs and seek to recover the total cost of the material, that is, both the original cost of the material and the escalated cost of the material. Claims for material escalation should seek only the difference between the original estimated cost and the actual cost because the original cost was already factored into the bid price. Finally, contractors often fail to consider the additional costs associated with material escalation as discussed in Section 11.6.2.

11.7. Equipment Costs After labor, the greatest variable cost item on most construction projects is equipment. On projects involving heavy civil work, equipment costs are closely related to labor costs. If additional labor is required, additional equipment is usually required because the work is not completed with bare hands alone. Moreover, equipment costs always increase when a project is extended, even in the absence of labor increases, because equipment costs are still incurred whether or not the equipment is operating. Equipment is distinguished from small tools primarily on the basis of cost. Frequently, small tools are defined as those items falling under a set value limit, typically $1,000. Often, small tools are accounted for as a direct cost to a project, whereas equipment is usually capitalized. The Construction Dictionary52 defines equipment as “all machinery and equipment together with the necessary supplies for upkeep and maintenance; also, tools and apparatus necessary for the proper construction

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and acceptable completion of the work.” The distinction between equipment and small tools is important in claims analysis for purposes of calculating increased costs. Equipment, as a capital item, is considered to be charged to the project only for the time it is on the project. Small tools, however, are typically considered to be consumed on the project. Increased equipment costs often are incurred due to one of the following events: • An extended performance period requiring the same amount of equipment to be on the project for a longer time period; • Additional work on the project requiring either the same equipment on the project for a longer time or new or additional equipment to perform the new work; and • Decreased productivity requiring more labor and, hence, more equipment.

In many construction claims, a combination of all three factors applies. The claim preparer should be aware, whether the project is for the federal government or private construction, that the additional cost for equipment can be recovered only if the equipment is in good working order and suitable for the project work.53 The cost of mobilizing or demobilizing equipment on an equipmentintensive project can be significant. The additional cost of an unanticipated demobilization followed by a remobilization can be a compensable cost of a delay or suspension of work.

11.7.1. Additional Equipment Usage When usage of additional equipment has occurred on a project, the calculation of the additional time period for the equipment is somewhat simple. The additional time period is the entire time the equipment was on the project. If the equipment was rented from an outside vendor, the cost of that equipment is the rental cost plus the operating costs of that equipment. Most contractors should have a consistent method for accounting for owned equipment. However, if the contractor or an affiliate of the contractor owned the equipment, the appropriate rate for the equipment can be the source of significant disagreement. If additional work results in additional use of the same equipment or if lower labor or work unit productivity results in increased equipment costs, calculating the additional equipment costs is necessary. Whether

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the equipment is on the project longer than anticipated in the contractor’s estimate can be determined by comparing estimated equipment hours, weeks, or months with actual usage. If additional equipment usage is a result of additional work, both estimated equipment costs and actual equipment costs can be used to determine the equipment costs allocable to the additional work. Ideally, the contractor will have cost-accounting records showing the equipment costs for each unit of work. The cost of equipment per unit of work is multiplied by the additional work units to obtain the added equipment costs. Even if the contractor does not maintain such records, recreating them may be possible by determining the cost for the appropriate equipment over the entire time the work was performed and then dividing it by the total number or work units to determine to equipment cost per work unit. This can then be multiplied by the number of additional work units to determine the equipment cost. One method used to calculate the number of additional equipment hours for a delay claim is to assume that each piece of equipment on the job was used for a full workday for each additional day of contract performance. This approach assumes that the equipment is chargeable to that project until it is reassigned to another project. Although the equipment may not be used a full workday every day, the full cost is charged to the project.54 Another method of calculating additional hours for a claim in which delays are asserted is to correlate equipment hours to the additional labor hours expended. This is a somewhat simple task when one operator is assigned to one specific piece of equipment. The contractor should assume that whatever additional time the operator worked, the equipment was also used for that amount of time. If more than one operator uses equipment, calculating additional equipment hours is more difficult. Correlating a piece of equipment to a particular crew is usually possible. For example, assume that a contractor had a crew of 25 assigned to various items of equipment, including one crane. It can be assumed that in one workday a crew of 25 would use the crane for 8 hours, resulting in a ratio of 200 labor hours (25 workers × 8 hours per day) to eight crane hours, which can be reduced to 1/25 or 0.04. Thus, 0.04 is the ratio of labor hours to equipment hours. If the crew expended an additional 34,000 labor hours on the project, the number of additional crane hours would be 34,000 × 0.04 or 1,360 additional crane hours. When additional equipment costs are required because of extended job duration, determining not only that the equipment was on site longer but also whether it was less productive or whether it sat idle part of the

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time because of the extension of the schedule is necessary. When the equipment is idle, charging rates reflecting operating cost—that is, fuel, oil, gas, operators, and similar items incurred only when the equipment is operating—is inappropriate. This distinction becomes more difficult to make when dealing with equipment related to job overhead or considered general conditions such as office trailers, storage vans, or superintendents’ trucks. When dealing with such general conditions items, it can generally be assumed that they are being operated or used all of the time. To recover costs for idle equipment, the contractor must establish that, but for the delay, the equipment could have otherwise been productively employed.55 Another consideration is whether the contractor made reasonable efforts to reassign the equipment to avoid leaving it idle. Of course, the uniqueness of the equipment, whether it was specifically designed and purchased for one project, and the location of the site are factors to consider in determining whether the equipment could be reassigned reasonably. Proving exactly when equipment was assigned to a contract and then reassigned can be difficult. When the equipment is rented or leased from an outside third party, the cost of placing equipment on standby when a delay or suspension of work has occurred is simple. The costs of the suspension or delay can be determined from the actual invoices from the rental companies or lessors. However, disputes frequently arise in valuing contractor-owned equipment. One method to minimize the disputes over the cost of contractor-owned equipment is to set forth the rate for each specific piece or type of equipment in the contract. When the delays have been substantial, or when the delays involve small tools, it is frequently argued that the upper limit to recovery of standby or idle cost is the actual value of the equipment. This assertion was expressly denied in Appeal of Western Alaska Contractors.56 The contractor was forced to leave equipment at a remote site in Alaska for 12 months as a result of a suspension of work. The contractor requested costs using the Data Quest Blue Book, including the allocable adjustments for age of equipment and location in use. The government argued that the recovery should be limited to the value of the equipment. However, because the contract did not provide any such upper limit, the contractor was allowed a recovery that exceeded the current value of the equipment. Recovery for idle equipment is limited to the equipment that is actually idle. In Pennsylvania Department of Transportation v. Herbert R. Imbt, Inc.,57 the contractor was denied recovery for standby equipment costs because the equipment was available to perform other work. The owner had ordered

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the contractor to demobilize the equipment, but the contractor decided to leave the equipment on site rather than divert it to another project. Because large equipment has to be moved from location to location by truck at substantial cost, contractors sometimes elect to leave the equipment on site until they have a use for it at a specific location. While this method of “storing” equipment is not uncommon, the contractor is not entitled to recover the cost of the “stored” equipment as idle equipment.

11.7.2. Cost of Equipment The contractor’s actual incurred equipment costs are the costs it is entitled to recover. The actual equipment costs are usually the contractor’s booked or recorded costs, provided no contractual or regulatory obligation exists to the contrary. The best indices of the costs of equipment are invoices from third-party vendors, assuming the equipment was rented and not owned by the claiming party. The contractor is reimbursed for the actual rent paid to the equipment supplier. For certain federal government contracts, regulations provide for the payment of outside rentals.58 If the contractor owns the equipment, the best source to determine equipment costs is the contractor’s actual internal equipment rates. Many contractors maintain separate equipment divisions or companies for the express purpose of standardizing equipment costs and maintaining adequate internal equipment rental charges. This allows the equipment to be leased to individual construction projects. Usually, these intracompany leases will be treated as any other lease. The lease or rent amounts incurred are costs that can be claimed. However, with respect to public contracts, the amount charged through intracompany leases can be limited to the actual ownership cost.59 The intracompany equipment rates should factor in and include the following: • Depreciation: Depreciation is the internal charge that reflects the decline of equipment value due to age, usage, condition, and obsolescence. It is an amount that is charged each accounting period to reflect the decreasing value of the equipment over its economic life. Even though a piece of equipment may be depreciated fully for tax purposes, it does not mean that depreciation as a component of equipment rates should not be charged. A piece of equipment that has been fully depreciated for tax purposes may well retain functional value.

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• Interest or cost of facilities capital: Interest is the cost of the funds used to purchase the equipment. This is an appropriate charge even when the contractor paid for the funds out of capital rather than borrowing the money. • Overhaul: Certain types of equipment, particularly heavy equipment, require periodic major overhauls or replacement of significant parts. Such overhaul costs should be considered in the equipment rate. • Repairs: Repairs are normal, recurring maintenance procedures necessary to keep equipment in running order and maintain its value. These may be reflected in the operating costs of the equipment as opposed to the rental rate. • Property taxes: Property taxes are taxes paid on the equipment annually. • Storage: The cost to store equipment during the portion of the year it is not in use. • Insurance: Insurance is the cost of insuring the equipment. • Operating period: The operating period is the time period in which the equipment can actually be used. Even though a contractor owns a piece of equipment an entire year, the appropriate monthly charge is not therefore one-twelfth of the annual cost. Many pieces of equipment are used far less than 12 months of the year. The rental rate must reflect this lowered usage. For example, a specialized piece of equipment that is used only four months of the year should have its entire annual cost divided by 4 rather than 12 for the appropriate monthly rate. However, if this piece of equipment is idle due to delay, this factor must be taken into account because the rate was calculated assuming specific idle months of the year.

All these factors must be considered in analyzing a contractor’s internal equipment rates. These items are appropriately charged, but they must be charged in a reasonable manner to determine the contractor’s internal equipment rates fairly and accurately.

11.7.3. Industry Guides Several industry manuals exist for determining equipment rates. In addition to the commonly used manuals discussed here, most contractor trade associations have a rental rate manual or rate survey available. The Associated General Contractors of America’s (AGC’s) Contractor’s Equipment Cost Manual, published annually by Data Quest, Inc.,60

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has reached widespread acceptance. The use of the AGC Manual is required in certain federal government contracts, after receiving approval by the United States Court of Claims.61 Other government agencies have allowed its use as well even though not required by regulation. The Armed Services Board of Contract Appeals has held that the usual method of calculating equipment standby costs is to use the “AGC rates reduced by half to reflect the lack of wear and tear, less profit.”62 The AGC Manual is intended to serve the entire construction industry by providing guideline figures for equipment costs. The rates do not include expenses for equipment operators or general cost items such as overhead and profit. The AGC Manual is divided according to types of equipment. To use it properly, very specific information is needed about the particular equipment, including the specifications of both model year and capacity. If that information is available, the AGC Manual will give an approximate base price for the equipment, the economic hours of use, and the annual use-hours upon which the rates are based. Additionally, the AGC Manual will give specific amounts for each component in the hourly ownership expenses, including depreciation; taxes; insurance; and the hourly repair and fuel expenses broken down by labor, parts, supplies, tires, fuel, and lubrication. Lastly, the AGC Manual gives combined ownership and repair expenses with monthly, weekly, daily, and hourly figures. Given this level of information, checking the actual project equipment usage against the assumptions contained within the rates is possible. When the actual factors differ from the assumptions in the AGC Manual, the rates must be adjusted. The Associated Equipment Dealers (AED) annually publishes a commonly used rental rate manual, which is referred to as the Rental Rates Compilation.63 This manual was developed by surveying thirdparty equipment dealers for the actual rates used. The rates are averaged for age, condition, and operating efficiency of the equipment. As a result, its rates, which include overhead and profit, tend to be higher than AGC rates. The AED rates are not comparable to the internal cost of owning equipment in most cases. Although certain federal government contracts require the use of AGC rates for contractor-owned or contractor-controlled equipment, the government may accept the AED rates if the contractor can show that these rates form the basis of the rates charged the contractor by a third-party vendor. Another commonly used industry standard is the Rental Rate Bluebook for Construction Equipment, commonly referred to as the Blue Book,64

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published by the machinery division of Data Quest, Inc. This manual is updated monthly and lists nearly all equipment that has been manufactured within the last five years. As with AGC rates, the Blue Book rates are broken down in detail, which permits analysis of the basic assumptions of the rates. The costs included in the Blue Book are intended as guidelines paralleling amounts an equipment owner should charge during rental or contractual periods to recover equipment-related costs. The use of the Blue Book was addressed in the case of Arcon Construction Co. v. South Dakota Cement Plant,65 where the owner had established that the contractor’s bid equipment rates were approximately one-tenth of the Blue Book rates. The court held A careful consideration of these authorities leads us to conclude that rental rates, such as those in the blue book, may be used as a guide to show damages resulting from idle equipment, providing they do not result in an unreasonable amount of damages. Of course, determining whether an amount is reasonable or unreasonable is the most difficult question. However, it is safe to say that when the blue book projects a cost for equipment which is 10 times the amount of the figure the contractor used in his bid, as is the case here, the blue book amounts are unreasonable. Since the jury award in this case is far more than Arcon would have received for equipment costs under its bid, had it completed the project on time, we find the award to be unreasonable and we reverse on the issue of damages. In order to give the trial court some guidance on retrial of the damage issue, we suggest the following: 1) Blue Book figures may be admitted by the trial court in its discretion if the court determines that this evidence would aid the jury on the issue of damages under the facts of this case. 2) If the Blue Book is admitted, it should be with the following admonitions to the jury: a) any sum allowed must be reasonable and should be premised in the first instance on an allocation of the cost of equipment for the period involved, based on the figure Arcon submitted for cost of equipment in its bid. b) This may be supplemented by evidence of other continuing costs of owning

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the equipment during the period it remained idle, as long as such costs can be proven with reasonable certainty. Examples of such costs include, but are not limited to, security, maintenance, taxes, interest on investment, etc. c) This may be further supplemented by a showing, if any, of the lost profits during the period the equipment was idle, as long as the profits can be proven with reasonable certainty. d) All of the factors outlined above must be counter-balanced by any showing of decreased costs which flow naturally from non-use of the equipment. Keeping those guidelines in mind, the jury should be able to come up with a figure that is not unreasonable and yet will fairly compensate Arcon for its equipment which remained idle due to the cement plant’s breach of contract.66

Thus, the use of Blue Book rates may be allowed to establish equipment damages even when the Blue Book rates are not specified. The Blue Book rates may be particularly helpful if the contractor could establish that its bid rates or internal charge rates were unrealistically low. The National Electrical Contractors Association (NECA) publishes a pamphlet, Tools and Equipment Rental Schedule,67 containing average rates for various equipment and tools commonly used by the electrical contracting industry. These are all-inclusive rates and assume the equipment is used on the project continuously. The rates include all costs except maintenance operators, energy, and delivery to the site. Government agencies such as the U.S. Army Corps of Engineers and most state highway departments also provide standard equipment rental rates. These rate schedules are often specifically incorporated into the contracts and must be used when calculating changes under the contract.

11.8. Overhead and Profit In addition to the direct costs of performing extra work, a contractor is normally entitled to a reasonable allowance for overhead and profit, typically in the form of fixed percentage markups on the direct cost of the work. These markups are either specified in the original contract or agreed to in writing by the parties after the contract has been signed. Combined rates for overhead and profit may be specified, such as 15%

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for overhead and profit, or separate markups on cascading direct costs as are sometimes used in U.S. Department of Veterans Affairs contracts. Separate percentage markups are used, including two overhead elements—jobsite (or field) overhead and home office overhead. When separate percentage markups are used for overhead and profit, care should be given to identify what each percentage is applied to. Applying 10% overhead to the direct cost of the work and 10% profit to the direct cost of the work results in substantially different amounts than applying 10% overhead to the direct cost and then 10% profit to the sum of the direct cost plus the overhead. The total markup becomes 21% under the latter scenario. In many cases, contractors include overhead and profit markups within their direct costs, particularly labor costs. Contractually agreed-upon labor rates should be analyzed to determine whether those rates include markups, which would be in addition to the separately identified markups. Inclusion of both in a claim could lead to the contractor obtaining a windfall.

11.8.1. Project Overhead Rates Computations of overhead costs pose special problems because isolating the extra overhead elements cost attributable to each individual contract change order is difficult. Overhead costs are not allocated to different items of work such as direct costs, but are rather lumped into a series of overhead accounts that are generally spread throughout all of the project accounts. When calculating a change order, the additional overhead costs that accompany the change are usually inseparable from the overhead costs expended for the base contract work. Some contracts provide a formula for the contractor to use to calculate the overhead on a “weighted” basis, using such factors as risk, complexity, and size of the change. However, in some cases, overhead costs may be incurred that are specific to the changed work. For example, if the changed work is significant, additional administrative personnel with attendant costs may have be brought in for the express purpose of managing the changed work. Overhead costs include two elements: (1) fixed costs and (2) variable costs. Fixed costs remain essentially unchanged over time or volume of work, for example, the monthly rental cost of an office trailer. The monthly cost of the office trailer will be the same every month, regardless of any changes or occurrences on the project. Variable costs fluctuate based on the volume of work, changes to the scope or schedule, and

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many other factors. An example of variable costs is fuel. Equipment may be used much more heavily during some periods of the project than others; therefore, fuel costs will be much greater during those high-use periods. Another example is seasonal costs such as temporary heat, which fluctuates with the time of the year. Typically, temporary heat and utilities will be greater in winter months than summer months, depending on the location of the project. Field overhead is described as “administrative costs to run a project, including such things as [a] superintendent, quality control, vehicles associated with those people, clerical staff, [and] office supplies.”68 Construction field overhead is generally recoverable. Unlike home-office overhead, field overhead consists of items that are required specifically for the project that cannot be reasonably allocated to any specific work item within the project. Normal field overhead, also referred to as general-condition costs, includes variable costs that continue to be incurred as the project is extended. If an item usually included in field overhead can be clearly segregated, a court or board may list it as a distinct item of damage. In many cases, the contract sets forth a fixed percentage for field overhead markup on change orders. As previously discussed, discrete identifiable overhead costs may be incurred as a result of the changed work. In those cases, the discrete overhead costs should be included along with the indiscrete overhead costs. For example, added personnel would be a discrete cost, but assuming they used the same office trailer as the base contract work, the trailer would be an indiscrete cost. Because many overhead costs appear to be fixed, owners are very reluctant to pay additional overhead costs without convincing documentation. This is a legitimate concern. Identifying and proving overhead costs that are hidden or do not show up until later in the job is difficult. These include the wear and tear on fixed assets and human resources, diversion of supplies or equipment that must later be replaced, and decreased attention to base contract work due to increased attention to the changes. Contract overhead is often spread thin at the outset to keep down costs, and changes can create significant demands on the contractor’s limited resources. Any means by which the contractor can identify and quantify such items early in the project are helpful in substantiating and recovering overhead costs. This includes actual cost records and historical cost records. The burden of proving that additional overhead was not only incurred but necessary solely as the result of the changed work falls on the contractor.

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On contracts without fixed-percentage markups, negotiating a supplemental agreement to the contract to permit fixed markups for minor changes is usually advantageous. This saves both the owner and contractor the time-consuming tasks of computing and analyzing overhead costs for each and every change order.

11.8.2. Overhead on Large Claims Major claims have several means of computing overhead costs, and the one offering the most reasonable results should be selected. The first method is similar to that discussed previously—applying percentages based on cost experience, the original bid percentage, or the contractstipulated percentages to the direct costs claimed. The second method is the total cost approach, where the bid overhead (plus any overhead received on other change orders) is deducted from the total actual overhead incurred during the period in question. Use of this method typically requires the contractor to prove that its original bid overhead was reasonable and all-inclusive; otherwise, the contractor would end up getting compensated for its own bid errors. A third method, which amounts to a modified total cost approach, is to take the total actual overhead and deduct the reasonable overhead. This method can be used over the entire project or for the affected time period only. Reasonable overhead can be computed several ways. The simplest method is to apply a percentage to the direct costs that would have been incurred had no change or delay taken place. For use in claims where a delay or suspension of work has occurred, a fourth method can be used—the average daily rate. An average daily rate for project overhead is calculated using the actual costs incurred and the actual days of performance. This rate is then multiplied by the number of days of delay or suspension experienced to arrive at the overhead cost for the affected period. Lastly, a fifth method is to identify, isolate, and include as direct cost items that were added for the purpose of administration of the specific claim or change order. For example, an additional supervisor, bookkeeper, or engineer required strictly because of the change would not be fairly compensated in the normal percentage markup. With this last method, the basic overhead for the change is computed on a percentage basis with an additional charge for the additional direct cost items. Using one or more of the methods for complex changes, such as those that add both significant work and additional time, may be appropriate.

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11.8.3. Home Office Overhead—Eichleay Formula In addition to field overhead, contractors incur home office overhead costs. These are expenses that serve all projects, such as home office rent, telephones, salaries, taxes, payroll, insurance, and bookkeeping expenses. These are the costs incurred by a contractor to conduct business but are not specific to any project. As such, these overhead expenses are an indirect expense that benefits all projects and must be allocated to all projects on a shared basis. For the purpose of routine change orders, a fixed-percentage markup is often negotiated, as described previously, that is added to direct costs along with project overhead and profit. In federal construction projects, which are governed by the Federal Acquisition Regulation (FAR), certain costs cannot be recovered as home office overhead, such as interest, advertising costs unrelated to recruitment of personnel, entertainment costs, bid preparation costs, and the costs of bad debts.69 If a delay in the progress of work results from a suspension of performance (rather than to accommodate the performance of extra work), there is no added direct cost against which to apply a percentage markup to compensate the contractor for the unabsorbed home office overhead incurred. Contractors also incur home office overhead expenses whenever the work takes longer than anticipated, regardless of the cause. In such circumstances, the Contract Board of Appeals and the courts have adopted several methods that may be available to the contractor. The Eichleay formula70 represents the most accepted method of calculating home office overhead in federal contracts, by computing home office overhead on a prorated daily rate basis. Contractors may use several other methods to calculate their home office overhead and should choose the method that best reflects what actually occurred and is most advantageous. Courts have set out a four-part test that must be met to use the Eichleay formula. The four requirements are 1. A delay of unreasonable length must extend the contract completion time. 2. The owner’s action or inaction must have proximately caused the delay. 3. The delay resulted in some injury. 4. No delay concurrent with the suspension that is the fault of the contractor is present.

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In Appeal of Eichleay Corp.,71 the Armed Services Board of Contract Appeals approved a method of calculating home office overhead expenses incurred during a suspension of the contractor’s performance. The accepted formula allocated the contractor’s main office expenses by finding a ratio of contract billings to total company billings for the performance period and multiplying that ratio by the home office overhead for the performance period. That figure is then divided by the number of days of performance to determine a daily rate of overhead. That daily rate of overhead is then multiplied by the number of days of delay. The standard Eichleay calculation is as follows: 0

1

B Total contract billings C A× @ Total billings for original contract period




Home office overhead for actual contract period

 =

Home office overhead allocable to contract

Home office overhead allocable to contract = Daily contract overhead Actual days of contract performance

 Number of days Daily contract × = Amount recoverable of delay overhead

In recent years, the federal courts have carefully defined the circumstances under which the Eichleay formula must be allowed. The formula must be allowed when a distinct period of government-caused suspension, or delay of work, has an impact on the absorption of the contractor’s fixed home office overhead expenses.72 However, the Eichleay formula remains the subject of great debate regarding federal government contracts and has not been unanimously accepted at the state level.73 Even where the Eichleay formula has been accepted, the requirement that a contractor be on standby as a result of the owner’s actions before it can recover under the Eichleay formula is another hotly debated issue. When the delay occurred prior to the start of work on the project, overhead is generally not recoverable under the Eichleay formula.74 Although other methods of computing home office overhead exist, Eichleay is clearly the formula of choice, as stated in 1994 by the Federal Circuit Court: Because it is impossible to determine the amount of unabsorbed overhead caused by the delay of any particular contract, and

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because the Eichleay formula provides an equitable method of compensating a contractor for unabsorbed overhead without costing taxpayers more than they should pay, we hold that the Eichleay formula is the exclusive means for compensating a contractor for unabsorbed overhead when it otherwise meets the Eichleay prerequisites.75

Even though other methods have been accepted in the past, unless and until such time the Federal Circuit Court accepts other formulas again, use of the Eichleay formula is recommended. Just because costs are recorded in its home office overhead expenses, those costs may not be compensable. For example, a contractor that owns an aircraft or has family members on its payroll (even though they are not actual employees) cannot typically recover those costs. Home office overhead costs included in an Eichleay calculation are generally required to be those costs typically required by a contractor and must also be reasonable.

11.8.4. Profit Profit is a contractor’s incentive to perform work, the lifeblood that sustains a contractor’s business. Except in unusual circumstances, owners cannot expect contractors to perform additional work without paying for profit on that work. Accordingly, profit is a well-recognized— although often disputed—element of construction claims. Profit is usually a fixed percentage amount to be added to the direct cost of the changed work. Some contracts restrict the general contractor’s markup for tiered subcontractor’s work to a much smaller amount than allowed for direct work. Often, the amount of profit that can be applied to changed work is defined in the contract documents. Profit on additional work performed is often easy to calculate in construction claims because the additional costs incurred can simply be marked up or multiplied by a figure that represents the profit percentage. In many cases, separate profit markups are used for different types of work. The markups on a contractor’s direct costs may be greater than that allowed on subcontractor costs or material costs. Profit may be divided into two categories: gross profit and net profit. Generally speaking, gross profit is the difference between the cost of performing the work and the total contract revenue received. Gross profit margins can vary widely among contractors and projects because

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contractors typically include different cost categories in their overhead. Gross profit margins are often inaccurate reflections of a contractor’s rate of return. Analyzing a contractor’s financial statements is therefore useful to determine the true overheads and, hence, the gross and net profit margins. Net profit is profit earned after the application of overhead costs but before the application of state and federal taxes. In some cases, the net profit margin may more accurately reflect the recoverable profit percentage in a construction claim. For example, gross profits may not be appropriately claimed concurrently with extended home office overhead costs. Therefore, net profit margins may be more appropriate when extended overhead is claimed because use of net profit prevents double recovery for overhead expenses. Use of net profits also allows home office overhead to be segregated from profit amounts. This is often advantageous for the owner in analyzing true costs of the changed work. The difficulty lies in determining the appropriate profit percentage by which to mark up the costs of performing the additional work. The more common methods available to determine the appropriate profit percentage are • • • • •

Amount specified in the contract, Original margin percentage used in bid, Contract rate specified for change orders, Contractor’s historical profit margin, and Industry average.

Where a deductive change has occurred—in other words, certain work has been removed from the scope of the contract—the change order often includes a deduction for the profit that would have been earned on the work that will no longer be performed. Other situations not involving termination may exist where the contractor was precluded from performing work that was otherwise within the scope of its contract. The profits on that unperformed work may be recoverable in those situations.76 Sometimes, contractors are denied profit on work not performed because such profits are considered too remote and speculative.77 Profits on unperformed work may be recovered when the contractor can establish that (1) it is reasonably certain that it would have profited but for the breach of contract, (2) the lost profit can be

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measured with reasonable certainty, and (3) the profits sought were reasonably within the contemplation of the parties when the contract was made.78 On occasion, contractors will claim profit lost on other future work it was unable to perform as a result of delays to the subject project. Generally, these are speculative costs and should be carefully reviewed. However, if the contractor can prove that it was actually precluded from performing work solely due to the delay, the profit on unperformed work may be recoverable. The burden of proof is with the contractor in these cases.79

11.9. Total Cost 11.9.1. Total Cost Method The total cost method of calculating claim damages subtracts the amount paid under the contract from the total cost incurred on the project plus markup to arrive at the amount owed.80 This method has great appeal to contractors due to its simplicity and because it allows them to recover what they invariably believe are their damages—all costs expended in excess of the estimate. However, courts have often criticized and rejected the total cost method because of the implicit assumption that the contractor did everything right and all cost overruns must be the result of owner actions.81 To protect against potential inaccuracies, the courts have fashioned a strenuous test that must be overcome by plaintiffs that want to use the total cost method. In WRB Corp. v. U.S., the Court of Claims summarized four conditions that must be met before consideration of a total cost approach. The contractor must prove 1. The nature of the particular losses makes it impossible or highly impracticable to determine them with a reasonable degree of accuracy. 2. The contractor’s bid or estimate was realistic. 3. The contractor’s actual costs were reasonable. 4. The contractor was not responsible for the added expenses.82 This standard is often referred to as the four-part test (see also Chapter 9). If the contractor is unable to satisfy its burden of proving all four

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elements of this test, use of the total cost method will be disallowed.83 However, when the contractor’s bid price is determined to contain inaccuracies and/or errors, a modified total cost method can be employed, which substitutes a reasonable bid for the contractor’s actual bid.

11.9.2. Modified Total Cost Method The modified total cost method was developed to address some of the deficiencies in the total cost method. It is essentially the same as the total cost method except the contractor reduces the amount claimed for costs that are the contractor’s responsibility, such as bid errors, costs arising from contractor errors such as correcting nonconforming work, and costs arising from actions of parties other than the owner. Thus, the modified total cost approach attempts to show what the project would have cost absent any contractor errors rather than the total actual costs incurred. The deductions are intended to result in a damages figure that “fairly represents the increased costs the contractor directly suffered from the particular action of the defendant, which is the subject of the complaint.”84 Using a modified total cost approach still requires the contractor to meet each element in the four-part test described previously.85 The estimates of value to adjust these other factors, of course, bring in new calculations that defendants can attack. When using either the total cost or modified total cost approach, identifying some elements of damages using actual costs is frequently possible. Any damage element that can be calculated using methods other than the total cost should be broken out from the claim and independently calculated. To the extent possible, total cost calculations should be made on separate discrete items or areas of the work, allowing further refinements of the calculation rather than taking all costs as a lump-sum amount.86

11.9.3. Last Resort The flaw in using the total cost method lies with the elements of damages for which it fails to account. The method assumes that the opposing party caused all additional costs, that the contractor asserting the claim flawlessly performed its work, and that the contractor accurately and precisely estimated the cost and schedule of the work to be performed. In something as complex as a construction project, such a simplistic

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analysis is obviously questionable, and the contractor should expect to be questioned on multiple issues, including • The validity and accuracy of the original estimate, • Errors and deviations from the work plan by the contractor that resulted in added costs, and • Events increasing cost (such as weather or labor strikes) that may not be the fault of the owner.

If the total cost or modified total cost methods are utilized, the claimant must address each of these points in any claim presentation as part of its burden of proof. Despite the disfavor that some courts have shown toward the total cost and modified total cost methods, they are permitted methods of damage calculations and have been used when the circumstances do not allow any other reasonable method of damage calculation. When the number and scope of changes, delays, or accelerations of contract are such that the amount of the contractor’s damages cannot be determined on a change-bychange or breach-by-breach basis, the total cost method is appropriate.87 On a complex project with hundreds of changes, identifying the specific cost of each change may not be practical or even possible. In fact, each individual change alone may not have a significant impact on project costs, but when considered in total comprise a significant impact. This is invariably the case when the contractor is trying to recover impact costs.88 In general, state and federal courts are primarily concerned with whether the calculation method is fair and reasonable and are therefore more likely to accept the total cost and modified total cost methods. However, the Boards of Contract Appeals are less willing to accept these methods, and contractors should use the total cost and modified total cost methods only as a last resort before the Boards of Contract Appeals.

11.10. Other Elements of Claim Pricing 11.10.1. Interest Costs A contractor is responsible for providing the capital required to perform a construction contract. If the project owner expands the scope of work and increases the contract price, however, the contractor may be able to

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recover the cost of borrowing funds necessary to perform the additional work.89 This assumes the contract does not contain a clause that specifically disallows interest charges or other capital costs. To collect interest, if allowed, the contractor must segregate the loan proceeds in a separate account and the funds must be used solely for performance of the change-order work.90 If the contractor does not borrow funds to perform change-order work, but uses its available equity capital, there may be no recovery from imputed interest, or the “cost” of this capital.91 Contractors, however, routinely argue that although they did not actually borrow additional funds, they lost the use of the funds they provided, and that the lost use of those funds has a corresponding cost. These four factors must be met for interest costs to be allowed: 1. 2. 3. 4.

The owner must have directed the work; The funds must have actually been borrowed; The borrowed funds must be segregated in a separate account; and The borrowed funds must have been used only for the changed work.

On federal construction contracts, interest on claims is allowable from the date that the contracting office receives the claim (certified if required), or the date payment otherwise would be due, if that date is later, until the date of payment.92 Simple interest for such claims is paid at rates fixed by the Secretary of the Treasury as provided in the Contract Disputes Act.

11.10.2. Insurance Costs Insurance is a significant and growing cost element of construction contracts and on certain contracts can be 1% or more of the total price of the contract. An owner’s action or inaction may cause the contractor to incur increased insurance costs that are a recoverable element of construction claims. Most insurance costs in construction contracts are for general liability and builder’s risk insurance. General liability insurance provides umbrella coverage against liability to third parties arising from the construction project but not directly related to the work. Conversely, builder’s risk insurance protects against loss or damage to the physical work during construction. Insurance costs can increase due to owner-directed changes and owner-caused delays. Insurance premiums are generally based on the total dollar amount of the contract. Thus, owner-directed changes that

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increase the total amount of the contract will also increase the insurance premiums the contractor must pay. When owner-directed changes increase the amount of the insurance premium, the contractor is entitled to recover the difference between the original premium price and the increased premium price. Similarly, owner-caused delays may require the existing insurance policies to be renewed for the extended duration of the contract. When the contractor incurs increased insurance costs due to owner-caused delay, the entire cost of the extended duration or new policy is often recoverable.93 Therefore, when preparing a claim, considering and including any insurance costs that the contractor may have incurred due to owner-caused changes or delays is important. A secondary consideration is if the changed work includes any design services on the part of the contractor. For example, imagine a project where the plans do not show how to install flashing of exterior openings, but the contract requires the contractor to comply with applicable codes. The Building Code requires flashing to weatherproof the exterior veneer. If the contractor performs the flashing work without the design professional’s approval, the contractor could be deemed to have assumed design responsibilities and thus any damage resulting from that work may not be covered under the contractor’s general liability insurance coverage. Not only should insurance premiums be included when pricing changed work, but the proper coverage should be determined so that the correct cost can be included in the change pricing.

11.10.3. Bond Costs Virtually all public and many private contracts require that the contractor provide performance and payment bonds to the owner guaranteeing performance of the contract and payment to subcontractors, vendors, and laborers. The Miller Act requires contractors to post performance and payment bonds on all federal construction contracts.94 Most states have enacted “Little Miller Acts,” which essentially duplicate the federal requirements, and contractors should be aware of the applicable state’s provisions. Subcontractors are also often required by the contractor to provide comparable bonds for their performance and payment responsibilities. Bonds assist in spreading the risk of nonperformance and nonpayment faced by owners, contractors, subcontractors, and suppliers. On private projects that do not require bonding, statutorily enacted

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mechanic’s liens protect the parties from the risks of nonpayment and nonperformance. Similar to insurance costs, contractors incur additional bond costs primarily when owner-directed changes or owner-caused delays occur. Like insurance, bond premiums are calculated on a percentage basis of the total contract value, and any increase in the value of the contract will increase the amount of the bond premium. Owner-caused delays may require the contractor to obtain additional bonding and incur increased bonding costs. In either situation, the cost of additional bond premiums is recoverable and should be considered and included in all claims and change orders. The cost of additional bond premiums can be calculated by two methods: indirectly based on a percentage of the equitable adjustment, or directly by multiplying the bond rate by the amount of the additional contract value. The most common method of calculating additional bond premiums is to mark up the change order by a certain percentage. The average markup for increased bonding costs ranges between 0.5% and 1.2% of the equitable adjustment.95 The direct method of calculating additional bond premium costs multiplies the base cost of the bond by the amount of increased contract value. The Armed Services Board of Contract Appeals has permitted additional bond costs to be calculated by use of the direct method.96 Because bond premiums are based on the value of the contract work, they are usually calculated per increment of contract value. As the contract amount increases, the percentage amount for bond premiums normally decreases, based upon the incremental or tiered premium costs. The direct method is simply an alternative to the percentage markup method and does not usually result in greater figures than those arrived at through the percentage markup method. When calculating increased bond costs, it is important not only to calculate the additional premium caused by increases to the contract value, but also to calculate the additional premium cost attributable to any extended durations on the project. Bond premiums are usually quoted for job durations of 24 months or fewer. There is frequently an adder to the bond premium for each month in excess of that duration. If owner-caused delays occurred on the project, considering and including those bond premium increases attributable to the extended duration of the project are important. Surety bonds have historically enabled contractors to transfer the risk of subcontractor failure, but bonds are no longer the only way to

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provide this benefit. An alternative solution is for owners to require the contractor to carry subcontractor default insurance (SDI). SDI coverage is a first-party indemnity policy intended to cover losses incurred by the insured general contractor due to subcontractor default or nonperformance. If the owner requires the contractor to maintain SDI, including those costs in the estimate is important. If the owner’s actions resulted in extended contract performance, contractors may also have a claim for loss of bonding capacity. Loss of bonding capacity claims are based on the theory that extended performance at significant losses will result in an inability to obtain future bonding and the inability to obtain future work.97 These claims often fail due to the highly speculative nature and difficulty in proving future profits. 98 To successfully recover on a lost bonding capacity claim, the contractor must prove that (1) projects were available during the extended period of performance, (2) the extended project’s negative cash flow prevented the contractor from obtaining future bonds, and (3) it is reasonably certain that the contractor would have profited on the anticipated work.99 The contractor must also show that not only was the work available, but that the contractor would have been awarded that work but for the lost bonding capacity. Once again, this typically is very difficult to prove due to the highly speculative nature of the claim.

11.10.4. Legal Fees, Change Orders, and Claim-Preparation Costs The costs of preparing routine change orders are typically considered incidental to contract performance and included as part of the overhead markup added to the price of the change order. One situation where discrete change-order-preparation costs may be allowed is when the owner requests a price for a change order but never actually issues the change order.100 On private and nonfederal contracts, legal fees are typically not allowed on claims unless specifically provided for in the contract. However, many courts have prevailing-party provisions that allow the prevailing party to recover legal fees subject to specific requirements. On federal contracts, the costs of legal, accounting, and consulting services, and related costs incurred in connection with “the prosecution of claims or appeals against the Federal Government” are unallowable.101 In other words, once a claim has met the definition as described in the FAR, further costs to pursue the case are not allowed.

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However, the fees of outside consultants have been allowed in some situations. “In contrast to the cases where recovery was disallowed, these consultant services were provided at a time when both sides were amenable to a contract modification and were actively negotiating a price adjustment. The efforts therefore provided a direct benefit to the contract and were not merely preparation of a claim.”102 Furthermore, the U.S. Court of Federal Claims has stated The line between costs that are incidental to contract administration and costs that are incidental to prosecution of a claim is rather indistinct, and in need of clarification. : : : The negotiation process often involves requests for information by [the owner], and inevitably this exchange of information involves cost for the contractor. These costs are contract-administration costs, which should be allowable since this negotiation process benefits [the owner], regardless of whether a settlement is finally reached or whether litigation eventually occurs, because the availability of the process increases the likelihood of settlement without litigation.103

Another situation that may allow recovery of legal fees is the Equal Access to Justice Act (EAJA). The EAJA provides that the prevailing nongovernment party can recover legal and consulting fees under the following conditions: • The business has a net worth of not more than $7 million and no more than 500 employees. • The contractor was the prevailing party in the appeal. • The government’s position in response to either the initial claim or the appeal was not “substantially justified.”

The EAJA provides for a maximum hourly rate of legal fees plus paralegal and consulting fees not exceeding rates paid for comparable services by the federal government. Certain preparation costs, expert witness fees, and expenses are also recoverable. Only those expenses incurred after the contracting officer’s decision are allowed by the EAJA. Under Miller Act claims, attorney fees are recoverable if one of the three previously discussed exceptions is present, or if the successful litigant conferred substantial benefit on a class of person or private litigation to enforce important public policies.

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11.10.5. Use of Expert Opinions The use of experts for large claims may be an expense well spent. Scheduling experts should be utilized when the claim involves delays, acceleration, and corresponding impacts. Experts can also be utilized to prepare independent unbiased estimates of work, particularly if the work has yet to be performed. A good consultant makes an objective analysis of the situation, one that can stand up under oath and scrutiny during testimony, and assists the respective parties to make more reasoned judgments on the validity of the time and costs claimed. Because a good consultant provides an independent evaluation and analysis of the contractor’s claim, an outside consultant or expert may find the value of an impact vastly higher or lower than the contractor’s assessment. In most cases, if an independent expert is called in during occurrence of the change, the expert can assist the contractor in finding ways to mitigate the effects of the change, thus also mitigating the damages incurred by the contractor. If incurred in the interest of preparation of change-order proposals, such costs are occasionally allowed as discussed in the previous section. When a contractor can show it mitigated its damages, and thus the potential claim, settlement of the claimed costs becomes a much more viable option.

11.10.6. Schedule Submissions for Payment Purposes Many projects require an updated critical path method schedule to either determine or accompany monthly progress payment requests. Although accepted during the course of the job for payment purposes, if the quantities and percent complete are not accurate, they will not be accepted in court for the purpose of schedule analysis. Conversely, if accurate, these submissions will help support baseline production rates used in claims. It is not unusual for owners to reject monthly schedules provided for payment purposes that do not show the contract completion date. In other words, while accurate, schedules that show the project behind schedule will be rejected along with the payment request. As a result, contractors submit schedules that do not show the true status of the project to obtain payment. However, when submitting a claim at a later date for delay, impact, and inefficiency, many owners resort to the contemporaneous schedules submitted with the pay application that showed the project on schedule and ultimately reject the claim. When a

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contractor is forced to submit inaccurate schedules to obtain payment, the contractor should also maintain an accurate schedule for later use. The contractor should also notify the owner that an accurate schedule is being kept separate from the submitted schedule.

11.10.7. Federal Cost Principles The federal government has developed a set of cost principles to assist in the negotiation of government contracts and contract modifications. Section 31.000 of the FAR states: This part contains cost principles and procedures for (a) the pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15.404-1(c)), and (b) the determination negotiation, or allowance of costs when required by a contract clause.104

These principles may be used as a guide, but the contractor should include those costs that it believes are justified and allowable. Portions 31.1 and 31.2 of the FAR contain various cost classifications and definitions. Of particular importance are several opening paragraphs in section 31.201 to 31.203, which discuss “determining allowability,” “determining reasonableness,” “determining allocability,” “direct costs,” and “indirect costs.”105 When submitting claims on government projects, these and other FARs should be closely examined and followed. Government contracts also often contain a provision giving the government the right to audit the contractor’s books and records. The FAR provides that if a modification is based on cost or the contract is a cost-reimbursement contract, the government has the right to examine and audit all records and evidence sufficient to properly reflect all costs claimed to have been incurred.106 The Defense Contract Audit Agency (DCAA) is the most widely recognized federal contract auditing body and acts as audit arm of the Department of Defense. The DCAA maintains its own audit guidance and reference materials including the Defense Contract Audit Manual. The manual contains an entire section dedicated to auditing claims and special types of costs that are typically claimed by construction contractors.107 The contracting officer generally relies heavily on any findings by the auditing agency; the contractor must therefore be aware that its claim may be audited, closely monitor any auditing processes, and be as responsive as possible.

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11.11. Conclusion The construction contract sets forth and defines the scope of the work and defines the various parties’ responsibilities and how changes to the work will be addressed, including compensation to the contractor. The contractor must maintain accurate contemporaneous cost and schedule records for it to prevail on its claims for additional costs. Conversely, the owner should insist on accurate contemporaneous documentation to allow for a realistic analysis of claims and changes submitted by the contractor. Accurate contemporaneous records maintained by both parties will aid in reaching a settlement that is far more productive than engaging in prolonged litigation. Litigation consumes resources— both time and money—and can require both owners and contractors to divert resources to the claim and litigation process that could otherwise be utilized more productively. Adhering to the contract requirements and engaging in forthright communication will aid in the resolution of disputes in a timely and cost-effective manner.

Endnotes 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11.

AIA-A201-2007, § 7.2.1, The American Institute of Architects (2007). Ibid, § 7.3.1. Ibid, § 7.3.2. U.S. Dept. of the Army, Office of the Chief of Engineers, Modification Impact Evaluation Guide, (1979 Edition), p. 3–4. Ibid. Ibid, p. 3–5. See, e.g., Ryco Construction, Inc., v. United States, 55 Fed. Cl. 184 (Ct. Cl. 2002) (the preferred method for calculating an equitable adjustment is the actual cost method; this method requires the contractor to provide the court with specific documentation of the added expenses caused by the government’s conduct). Bruce Constr. Co. v. United States, 324 F.2d 516, 520 (Ct. Cl. 1963). State Hwy. Com’n of Wyo. v. Brasel & Sims Const. Co., Inc., 688 P.2d 871 (Wyo. 1984). In that situation, a correspondingly large underrun may exist in the subcontractor category. Appeal of Noraire Engineering Corp., ENGBCA No. 3981 (1980). See also, Appeal of R.W. Contracting Inc., ASBCA No. 24627 (1984) (contractor’s claim denied where the contractor’s damages witnesses did not account for variations in the claimed productivity losses from impacts that were specific to the work and the

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12.

13.

14. 15. 16.

17.

18.

19. 20. 21.

22.

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contractor produced no documentation that was contemporaneous with the alleged impacts to demonstrate the lack of efficiencies). Corban Industries, Inc., v. United States, 24 Cl. Ct. 284 (1991) (where contractor could not account for lack of records supporting its cost and materials and did not put forth any factual predicate that would allow court to make a fair and reasonable approximation of the amount of termination costs that it sustained for materials, court could not award termination costs). See e.g., Prunty Constr., Inc. v. City of Canistota, 2004 SD 78, 682 N.W.2d 749 (2004) (court defined a “unit price,” or “unit bid,” contract as one in which the contractor submits a price per unit for each of the various categories involved; this type of contract is used when final quantities of work cannot be determined with accuracy until final completion; clearest indication that a contract is a “unit bid” contract is from the advertisement for the bid and the bid itself). Tufano Contracting Corp. v. State, 269 N.Y.S.2d 564 (1966), aff’d, 309 N.Y.S.2d 355 (1970). AIA-A201-2007, § 7.3.4, The American Institute of Architects (2007). ACE Constructors, Inc. v. United States, 70 Fed. Cl. 253 (Mar. 31, 2006) aff’d, 499 F.3d 1357 (Fed. Cir. Sept. 19, 2007); George Sollitt Construction Co. v. United States, 64 Fed. Cl. 229 (Fed. 23, 2005). See e.g., AIA A201-2007, § 7.3.3 (“If the Construction Change Directive provides for an adjustment to the Contract Sum, the adjustment shall be based on one of the following methods: (1) mutual acceptance of a lump sum properly itemized and support by sufficient substantiating data to permit evaluation; (2) unit prices stated in the Contract Documents or subsequently agreed upon; (3) cost to be determined in a manner agreed upon by the parties and a mutually acceptable fixed or percentage fee; or (4) as provided in subparagraph 7.3.6 [after-the-fact determination based on actual cost]”). See e.g., Appeal of George Hyman Constr. Co., ENGBCA No. 4541, 85-1 BCA ¶17847, 1985 WL 16440 (Jan. 10, 1985) (contractor sought to recover cost of material escalation incurred due to owner-caused delay; instead of offering evidence as to the material costs estimated at bidding to establish what the material would have cost had the work been performed as planned, the contractor used cost indices published by Engineering News Record to establish the material costs and then worked backward to determine the “deflated” cost; the contractor recovered the difference between the actual material costs incurred and the deflated cost). U.S. Dept. of the Army, Office of the Chief of Engineers, Construction Contract Negotiations Guide, (1974 Edition) p. 4–8. Id. Bruno Law & Richard Marlink, Trustees v. United States, 195 Ct. CL. 370 (1971); also see Appeal of Batteast Construction Co., Inc., ASBCA No. 35818 (Dec. 31, 1991) (contractor compensated because a directed change in the mortar mix specification resulted in lost labor productivity for masonry work). For a comprehensive treatment of productivity losses, see, William Schwartzkopf, Calculating Lost Labor Productivity in Construction Claims (2nd Ed., Wolters Kluwer 2004, and annual supplements).

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23. Dr. H. Randolph Thomas, and Dr. Amr A. Oloufa, “Labor Productivity, Disruptions, and the Ripple Effect,” Cost Engineering Journal, Vol. 37/No. 12 (December 1995). 24. The Business Roundtable, Scheduled Overtime Effect on Construction Projects, Construction Industry Cost Effectiveness Task Force Report (Nov. 1980). 25. Id. 26. National Association of Women in Construction, Construction Dictionary (4th Ed. 1980). 27. Id; see Dick Hollan, Inc., ASBCA No. 21304, 77-1 BCA (CCH) ¶ 12,540 (1977). 28. Id. 29. National Association of Women in Construction, Construction Dictionary (4th Ed. 1980). 30. Luria Bros. & Co. v. United States, 177 Ct. Cl. 676 (1966); Levering & Garrigues Co. v. United States, 73 Ct. Cl. 566 (1932); Kelly & Kelly v. United States, 31 Ct. Cl. 361 (1896); Annotation, Right of Building or Construction Contractor to Recover Damages Resulting from Delay Caused by Default of Contractee, 115 A.L.R. 65 (1958). 31. Mead Corp. v. McNally-Pittsburg Mfg. Corp., 654 F.2d 1197 (6th Cir. 1981); Abbett Elec. Corp. v. United States, 162 F. Supp. 772 (Ct. Cl. 1958); Levering & Garrigues Co. v. United States, 73 Ct. Cl. 566 (1932); Foley Eng'g & Constr., Inc., ASBCA No. 32958, 87-2 BCA (CCH) ¶ 19747 (1987); C. Walker Constr. Co., VABCA No. 1527, 82-2 BCA (CCH) ¶ 15,799 (1982). 32. C.F.I. Constr. Co., DOT CAB Nos. 1782, 1801, 87-1 BCA (CCH) ¶ 19547 (1987); Berkeley Constr. Co., VABCA No. 1962, 88-1 BCA (CCH) ¶ 20259 (1987); Thurmont Constr. Co., ASBCA No. 13417, 69-1 BCA (CCH) ¶ 7602 (1969). 33. ADCO Constr., Inc., PSBCA Nos. 2355, 2455, 2465, 2480, 90-3 BCA (CCH) ¶ 22944 (1990); J. Tieder & J. Hoffar, Proving Construction Contract Damages 180 (1990). 34. Sherman R. Smoot Co. v. United States, 516 F. Supp. 260 (D.D.C. 1981). 35. Heron, Impact of Material and Fuel Shortages on Contracting, 11 Forum 1005 (1976). 36. United States v. Spearin, 248 U.S. 132 (1918); Berkeley Constr. Co., VABCA No. 1962, 88-1 BCA (CCH) ¶ 20259 (1988). 37. Thurmont Construction Co., ASBCA No. 13417, 69-1 BCA ¶ 7602, 1969 WL 656 (Apr. 2, 1969) (the specifications were defective in specifying an unattainable requirement; when the government changed the specifications to provide for an attainable requirement, it was required to make an equitable adjustment in the contract price if the change caused an increase in the contractor’s cost of performance). 38. See Edward M. Crough, Inc. v. Department of Gen. Servs. of D.C., 572 A.2d 457 (D.C. Apr. 5, 1990) (discussing principles set forth in Aerodex, Inc. v. United States, 417 F.2d 1361 (Ct. Cl. Nov. 14, 1969)). 39. See John C. Grimberg Co. v. United States, 869 F.2d 1475 (Fed. Cir. Mar. 15, 1989); Blake Constr. Co., ASBCA 30658, 85-3 BCA ¶ 18,420, 1985 WL 17063 (Sep. 13, 1985). 40. See Edward M. Crough, Inc. v. Department of Gen. Servs. of D.C., 572 A.2d 463 (D.C. Apr. 5, 1990); General Ship Corp. v. United States, 634 F.Supp. 868 (D. Mass. May 12, 1986). 41. See Interstate Coatings, Inc. v. United States, 7 Cl. Ct. 259, 261 (Jan. 14, 1985). 42. See General Ship Corp., v. United States, 634 F.Supp. 868 (D. Mass. May 12, 1986) (citing Interstate Coatings).

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43. See Edward E. Gillen Co. v. City of Lake Forest, 3 F.3d 192 (7th Cir. August 17, 1993) (quoting United States v. Spearin, 248 U.S. 132 (Dec. 9, 1918)). 44. American Bridge Co. v. State, 245 A.D. 535, 283 N.Y.S. 577 (1935). 45. Hartford Accident & Indem. v. District of Columbia, 441 A.2d 969 (D.C. 1982); Cushman et al., Delays and Disruptions in Construction Litigation (1981). 46. F.A.R. 31.205-26(a). 47. John McShain, Inc. v. District of Columbia, 205 F.2d 882, 884-85 (D.C. Cir. 1953). 48. See Tieder, Hoffar & Cox, Calculating and Proving Construction Damages, 82-3 Construction Briefings (1982). 49. George Hyman Constr. Co., ENGBCA No. 4541, 85-1 BCA (CCH) ¶ 17847 (1985). 50. Id. 51. Id. at p.89, 342. 52. National Association of Women in Construction, Construction Dictionary (4th Ed. 1980). 53. F.A.R. 31.105(d)(2) (provides that payment will be allowed only for equipment in “sound workable condition”). 54. R. Nash, Government Contract Changes 396 (1975). 55. C.L. Fairley Constr. Co., ASBCA No. 32581, 90-2 BCA (CCH) ¶ 22665 (1990). 56. Appeal of Western Alaska Contr., ASBCA No. 46033 (Dec. 30, 1994). 57. Department of Transportation v. Herbert R. Imbt, Inc., 630 A.2d 550 (Pa. Commw. Ct. 1993). 58. F.A.R. 31.105(d)(2)(ii), 31.205-36(b)(1). 59. F.A.R. 31.205-36(b)(3). 60. Associated General Contractors of America, Inc., Contractor’s Equipment Cost Manual (1920). 61. Nolan Bros. v. United States, 437 F.2d 1371 (Ct. Cl. 1971). 62. C.L. Fairley Constr. Co., ASBCA No. 32581, 90-2 BCA (CCH) ¶ 22665 (1990). 63. Equipment Watch, The AED Green Book 2014 Rental Rates & Specifications for Construction Equipment (2014). 64. Equipment Watch, Rental Rate Blue Book (2016). 65. Arcon Constr. Co., Inc., v. South Dakota Cement Plant, 349 N.W.2d 407 (S.D. 1984). 66. Id. 67. National Electrical Contractors Association, Tools and Equipment Rental Schedule 2015-2016 (2015). 68. Ace Constructors, Inc. v. United States, 70 Fed. Cl. 253 (Fed. Cir. Mar. 31, 2006), aff’d, 499 F.3d 1357 (Fed. Cir. Sept. 19, 2007) (Ace awarded field overhead equal to approximately 8.2% of direct costs before markup on both its differing site condition and defective specification claims). 69. See, 48 C.F.R. §§ 31.205-1-31.205-23 (1990). See also, Reynolds, “Recovering Delay Damages for Home Office Overhead,” 89-13 Construction Briefings (1989). 70. Appeal of Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688, 1960 WL 538 (July 29, 1960), adhered to on reconsid., 61-1 BCA ¶ 2894, 1960 WL 684 (Dec. 27, 1960). 71. Id. 72. Capital Electric Co. v. United States, 729 F.2d 743 (Fed.Cir. 1984). 73. See e.g., Alamo Community College Dist. V. Browning Constr. Co., 131 S.W.3d 146 (Tex. App. Jan. 14, 2004), reh’g overruled (Feb. 9,2004), review denied (2 pets.)

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75. 76.

77.

78.

79. 80. 81. 82.

83.

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(Apr. 8, 2006) (the court declined to determine whether the Eichleay formula was accepted in Texas). Nicon, Inc. v. United States, 331 F.3d 878 (June 10, 2003) (where the contractor never began contract performance, it was not entitled to unabsorbed home office overhead for the period between the date of contract award and the government’s termination for convenience; there were no actual days of contract performance and actual contract billings, as required for use of the Eichleay formula). Wickham Contracting Co., Inc. v. Fischer, 12 F.3d 1574 (Fed.Cir. 1994). Tolar Constr., LLC v. Kean Elec. Co., Inc., 944 So. 2d 138 (Ala. May 19, 2006) (when a plaintiff sues on a contract to recover the amount he or she would have received for the full performance prevented by the defendant’s breach, he or she seeks in effect to recover as damages the profit from performance of the contract that defendant’s breach prevented him or her from earning). See e.g., Spradlin Rock Products, Inc. v. Public Utility District No. 1, 266 P.3d 229 (Wash. App. Nov. 3, 2011) (contractor sought to recover lost profits it would have earned on a small works contract it contended it would have been awarded if the Public Utility District (PUD) had not wrongfully removed it from the roster; the court found the contractor’s continuous business relationship with the PUD “gave it a reasonable basis to believe it would have received the Frye Creek project”; further, the contractor was not required to establish with absolute certainty that it would have been awarded the project but for the PUD’s breach). Wisch & Vaughan Constr. Co. v. Melrose Props. Corp., 21 S.W.3d 36 (Mo. App. May 16, 2000); see also, Lewis Jorge Constr. Mgmt., Inc. v. Pomona Unified Sch. Dist., 34 Cal. 4th 960 (Dec. 23, 2004) reh’g denied (Feb. 16, 2005). See e.g., Dill v Chastain, 507 S.E.2d 872 (Ga. Ct. App. 1998); Warner Constr. Corp. v. City of Los Angeles, 2 Cal. 3d 285, 85 Cal. Rptr. 444, 455 (1970). Layne-Minnesota P.R., Inc. v. Singer Co., 574 F.2d 429 (8th Cir. 1978). See also, J. Cibinic & R. Nash, Administration of Government Contracts, 514 (2d Ed. 1986). Youngsdale & Sons Construction Co., Inc. v. United States, 27 Fed. Cl. 516 (Ct. Cl. 1993); see also, Ryco Construction, Inc. v. United States, 55 Fed. Cl. 184 (Ct. Cl. 2002). WRB Corp. v. United States, 183 Ct. Cl. 409 (1968); see also, Servidone Construction Corp. v. United States, 931 F.2d 860 (Fed.Cir. 1991) (contractor allowed to use the total cost method because all four conditions for its use were met). See e.g., Ryco Construction, Inc. v. United States, 55 Fed. Cl. 184 (Ct. Cl. 2002) (plaintiff was unable to prove all elements of the four-part test employed to determine whether the total cost method may be used; plaintiff contractor’s books and records were more than sufficient to assemble a claim based upon actual costs, therefore failing the first element; plaintiff also failed to prove that its bid was reasonable, failing the second element). G.M. Shupe, Inc. v. United States, 5 Cl. Ct. 662 (1984). See McKie v. Huntley, 620 N. W.2d 599 (S.D. 2000) (noting that many courts have approved a modified total cost approach that allows for the deduction of the cost of all problems ascribed to the contractor); Baldi Bros. Constructors v. United States, 50 Fed. Cl. 74 (Ct. Cl. 2001) (the modified total cost method allows the court to adjust a claim when a contractor’s initial bid is found unreasonable by substituting a reasonable bid amount into the calculations; however, both types of total cost claims, modified

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85. 86.

87.

88.

89. 90. 91. 92. 93. 94. 95.

96. 97. 98.

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or not, are “not favored and should only be resorted to when ‘actual costs’ cannot be determined”). Servidone Construction Corp. v. United States, 931 F.2d 860 (Fed.Cir. 1991). Steiny & Co., Inc. v. J.A. Jones Construction Co., 2002 WL 596800 (Cal. App. 2002) (unpublished) (award of damages upheld where subcontractors calculated their damages through a modified total cost approach, taking into account particular elements of work, trades or skills, facility areas, and job aspects; they compared what their expected costs should have been against what they actually were and only in specific work that was affected by delay and disruption). See McKie v. Huntley, 620 N.W.2d 599 (S.D. 2000) (once liability is established by a preponderance of the evidence, the total cost method of calculating damages may be appropriate for those disputes where quantifying losses from changed conditions is difficult or impractical); Thalle Construction Co., Inc. v. WhitingTurner Contracting Co., Inc. 39 F.3d 412 (2d. Cir. 1994) (court held that two steps are involved in total cost calculations: (1) the difference between contract price and total job costs, including overhead and profit, must be ascertained; and (2) delay damages must be apportioned according to each party’s responsibility; the court noted that the second prong of the total cost calculation, apportionment of delay, may be an “onerous task”). J.D. Hedin Construction Co. v. United States, 347 F.2d 235 (Ct. Cl. 1965); see also, C. Norman Peterson Co. v. Container Corp. of America, 218 Cal. Rptr. 592 (Ct. App. 1985) (recovery under the total cost method was allowed where it became impossible for the contractor to keep exact cost records for each of the hundreds of changes order by the owner). Joseph Bell v. United States, 404 F.2d 975 (Fed.Cir. 1969). Appeal of J.W. Bateson Co., Inc, VABCA No. 1148 (Dec. 4, 1985). Gevyn Construction Corp. v. United States, 827 F.2d 752 (Fed.Cir. 1987). F.A.R. 33.208. Luria Bros. & Co. v. United States, 369 F.2d 701 (Ct. Cl. 1966). See 40 U.S.C. § 3131 (2006); F.A.R. 28.102-1. See Excavation Constr., Inc., ENGBCA No. 3858, 82-1 BCA (CCH) ¶ 15770 (1982) (equitable adjustment marked up by 0.47 to accommodate increase bond costs); Fidelity Constr. Co., DOT CAB No. 1113, 81-2 BCA (CCH) ¶ 15345 (1981) (equitable adjustment marked up by 1.2% to accommodate the increased bond costs). Owen L. Schwam Constr. Co., ASBCA No. 22407, 79-2 BCA (CCH) ¶ 13919 (1979). Tieder, Hoffar & Cox, “Calculating and Proving Construction Damages,” 82-3 Construction Briefings (1982). See e.g., Olin Jones Sand Co. v. United States, 225 Ct. Cl. 741 (1980) (where petitioner was denied recovery of consequential damages for impairment of bonding capacity for being too remote and speculative as “receipt or non-receipt of future contracts is both speculative in nature and dependent on many factors not related to bonding”); MLK, Inc. v. University of Kansas, 940 P.2d 1158 (1997); S.C. Anderson, Inc. v. Bank of America, 24 Cal.App.4th 529 (5th Dist. 1994) (plaintiff produced insufficient evidence to establish lost profits due to impairment of bonding capacity). See Raymond Int'l, Inc. v. Baltimore Constr., 412 A.2d 1296 (Md. 1980).

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100. Appeal of Tele-Sentry Security, Inc., GSBCA No. 7037 (May 7, 1984); see also Appeal of Kirk Bros. Mechanical Contractors, Inc., ASBCA No. 35771 (June 29, 1992). 101. F.A.R. 31.205-47. 102. “Recovery of Change Order Administration Costs,” Construction Claims Monthly, Sept. 1996. 103. Bill Strong Enterprises, Inc., v. Shannon, 49 F.3d 1541 (Fed.Cir. 1995). 104. F.A.R. 31.000 105. F.A.R. 31.201, 31.203 106. F.A.R. 52.215-2. 107. Defense Contract Audit Manual. Chapter 12. “Auditing Contract Termination, Delay/Disruption, and Other Price Adjustment Proposals or Claims.”

Chapter 12

Negotiations Kathleen O. Barnesa

12.1. Introduction Parties to construction contracts almost universally encounter issues, events, and impacts that may lead to increased costs and delays—some of which are the responsibility of the contractor and others the responsibility of the owner. The benefits of making every reasonable effort towards the early resolution of any disputes arising from these project events and impacts cannot be overemphasized. Many methods are available to resolve disputes between parties to a construction contract, including litigation, arbitration, or other alternative dispute resolution (ADR) procedures. Negotiation of the dispute, however, is most often preferable to other methods of dispute resolution because it generally requires the least investment of time and money. Negotiations (as addressed in this chapter) do not involve third-party referees or decision makers; therefore, the methods, manner, and outcome of negotiations remain within the control of the parties. Finally, the lines of communication and mutual respect established by the parties during successful project negotiations may assist with the resolution of larger end-of-project disputes. For these reasons, and perhaps others, it is in the best interests of all parties to attempt to resolve their disputes through negotiation—at least initially—rather than resort to more timeconsuming and costly methods of dispute resolution. Successful negotiations, however, are more than a simple matter of splitting the difference between the positions of the parties. It has been a

Senior Partner, Watt, Tieder, Hoffar & Fitzgerald, LLP. 321

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said that “information is the greatest weapon of a negotiator” and that the successful negotiator must be part Sigmund Freud and part Sherlock Holmes.1 Said a different way, negotiation of a construction claim or change order is both an art and a science. Negotiation requires the deliberate application of expertise, knowledge, skill, and strategy aimed at the accomplishment of a specific goal: achieving an equitable adjustment to the contract that is both disappointing and satisfying enough to each party to represent what they consider to be the best result. This chapter discusses the negotiation of a construction change order or claim. Many books and articles focus on the use of tactics and the “do’s” and “don’ts” of negotiations. The emphasis here will be primarily on preparation for the negotiations and the knowledge of the parties because these factors are key to success in this type of negotiation.

12.2. The Need for Contract Negotiation As a prerequisite to further dispute resolution procedures, construction contracts often include provisions requiring that the parties undertake a direct negotiation process and make good-faith efforts to reach resolution at the level where direct knowledge of the dispute exists. For example, construction contracts generally will include a process, including negotiation for the identification of changes to the contract and the determination of any costs and/or delays associated with the changes. A construction contract also may include the following basic language requiring negotiation of a dispute prior to litigation or arbitration: Owner and contractor agree to enter into negotiations to resolve any dispute arising under or relating to this subcontract. Both parties agree to negotiate in good faith to attempt to reach a mutually agreeable settlement within a reasonable amount of time. If negotiations are unsuccessful after 45 days, either party may initiate litigation in a court of competent jurisdiction within (the relevant state).

Many contracts require that the parties make efforts to negotiate and resolve a claim or dispute at two or more levels of company personnel before they resort to arbitration, litigation, or other methods of dispute

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resolution. For example, contract clauses similar to the following may require negotiation of disputes: • Negotiation. In the event of any claim, contractor’s representative and owner’s representative, or their respective designees, shall attempt in good faith to settle such claim by mutual discussions within thirty (30) calendar days after the date that either party submits the notice of claim and supporting documentation to the other party. • Senior management review. In the event that the claim is not resolved in accordance with Article___ within the thirty (30)-day negotiation period, the parties shall refer the claim to their respective senior managements for further consideration. In the event that the respective senior managements of owner and subcontractor are unable to reach agreement within fifteen (15) calendar days of such referral to them, or such longer period as they may agree, the claim may be referred to arbitration in accordance with Article ___. • Senior management review. In the event that the claim is not resolved within the thirty (30)-day negotiation period, the parties shall refer the claim to their respective senior managements for further negotiations between senior management personnel not directly involved in the dispute. In the event that the negotiations between the senior management representatives of owner and contractor are unsuccessful within 45 days, either party may initiate arbitration in accordance with Article___.

The requirement to send the dispute to upper management personnel if the project representatives reach an impasse in their negotiations is an effort to ensure that negotiations get a fair chance at success. Project personnel may have the most direct knowledge of the issues, but may also have an emotional stake in the dispute, which may hinder effective compromise. Most likely senior management will have more of an interest in maintaining the overall business relationship and may have the authority to fashion a more creative settlement than a simple financial deal. Regardless of the contract requirements, the potential savings in time and money associated with the prompt resolution of change orders and claim disputes make it a prudent choice to seek a negotiated resolution to any construction dispute.

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12.3. Determining Your Bottom Line2 What is this claim really worth? Are the documents and witnesses necessary to prove the claim available? Is the contract and applicable law in our favor? Should we negotiate or take this claim to court? Just how much will it cost to litigate/arbitrate this claim to conclusion? Do we need to collect the claim amount soon, or can we hold out 1–3 years while the dispute works its way through litigation or arbitration? The successful negotiation of a construction claim begins with the objective consideration of the strengths and weaknesses of the claim and the determination of a reasonable goal for settlement. This is not the time for the contractor to undervalue the claim or for the owner to talk itself out of the validity of the defense. Yet, the parties should ask the hard questions and consider the responses objectively. The following issues are those that a contractor or owner must evaluate in order to formulate a definitive and defensible negotiation position and bottom line for negotiation.

12.3.1. Reaching Consensus A word of caution before we begin: The process of developing a unified strategy for negotiations and a consensus regarding the bottom line value of a claim likely will require the agreement of various departments within the company; therefore, the negotiating party should not be surprised if reaching internal agreement regarding whether or not to negotiate and how and where to set the bottom line for negotiations is sometimes as difficult—or even more difficult— than the actual negotiations with the opponent. The project personnel closest to the claim and the issues surrounding the dispute may want to hold out for a larger amount in order to vindicate their handling of the issues on the project. The financial divisions will see primarily the bottom line and the company’s need for an immediate infusion of cash. Upper management may be more interested in maintaining a good working relationship with a good customer. Reaching consensus on the bottom line and strategy for negotiation of a change order or claim among the various interests and agendas within the party’s own company is an important first step toward a successful negotiation.

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12.3.2. Have Claim Rights Been Properly Preserved? Construction contracts most often contain requirements for the provision of notice of a potential claim event or dispute. When a potential claim occurs, a contractor must be sure to give notice or take whatever other steps are required by the contract to preserve its claim rights. Although a contractor may eventually decide not to pursue actively a particular claim, proper notice is necessary in order to preserve the option to proceed. It may not be possible to categorize or even price a claim accurately within the minimal amount of time generally permitted by a contract’s notice requirement. The contractor may not even be able to determine which of the contract’s remedy-granting clauses best addresses the impact suffered. Nonetheless, a contractor should give notice of the claim event within the earliest time required under the contract and reserve the right to provide additional details, including cost information, if required, once the information can be gathered. To ensure that timely notice is given, it is essential that project personnel be thoroughly familiar with the remedy-granting provisions of the contract. Several contractor organizations have developed claim checklist forms in which pertinent remedy-granting provisions and deadlines for notices can be noted for specific contract documents. However it is done, a contractor must ensure that project personnel are aware of, and are following, all contract-specific deadlines. It is also important to ensure that claim rights are preserved when change orders are executed. Though a change order may appear simple at the time of issuance, it may have a substantial impact at some later date. Accordingly, contractors should consider whether to include a reservation of rights statement such as the following: The compensation allowed by this change order does not include any amounts for changes in the sequence of work, delays, disruptions, and/or impact costs, and the right is expressly reserved to make claims for any and all of these related items of cost prior to any final settlement of this contract.

12.3.3. Strength of Claim Presentation Unlike other types of legal actions, the resolution of most construction contract claims does not begin with the filing of a lawsuit or demand for

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arbitration. Rather, the first step in settlement is a strong, initial change order proposal or claim presentation. The goal in the preparation of the proposal or claim must be clarity and brevity, making the presentation as organized, persuasive, and understandable as possible. The key elements of any claim are entitlement and damages. The claim presentation first must establish entitlement: causation by the owner or its agent, the contract clause that provides for the remedy requested, and the effect of the owner’s action or inaction in terms of additional or changed work. Only after including sufficient information to convince the owner of entitlement should the claim begin a discussion of damages. Owners are not impressed by general discussions of large money losses. Rather, the damages section should address, if possible, the actual, additional costs incurred by the contractor with reference to specific cost codes tracking the costs or by calculation using methods approved in case law or government publications.3 A realistic, organized, and accurate claim package is convincing and should assist greatly in the negotiation of the claim. Contractors, however, should resist the temptation simply to maximize the amount of the claim in any way possible. Contractors may advocate such an approach, perceiving that no matter the amount of legitimate damages, the contractor will never recover more than 50 or 60 cents on each dollar of its claim amount. Others simply may desire to jump-start negotiations using “fat” in the claim that can be readily conceded. This approach is fraught with pitfalls. Under no circumstances should a contractor present a deliberately inflated claim (i.e., a claim that includes costs to which the contractor knows it has no entitlement). On a public contract, such conduct exposes the contractor to harsh penalties under the federal False Claims Act,4 Contract Disputes Act,5 and Forfeiture of Fraudulent Claims Act,6 and similar state statutes, particularly in light of the government’s recent focus on stricter and more frequent application of those statutes. Even stretching the boundaries of claimable costs and presenting claims that, in whole or in part, have only marginal support may prompt the government to invoke one or more of the aforementioned statutes and can lead to significant liability and/or the loss of potentially valid claims.7 Although these statutes do not apply to private contracts, presenting a claim inflated with easily rebutted costs still can damage the contractor’s credibility during negotiations as well as before the ultimate fact finder (whether a court, arbitrator, or jury), diminishing the chance of prevailing on the truly legitimate portions of the claims. “Fat” in a claim is

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usually recognized as such. Frequently, it is more damaging than beneficial because the owner will be suspicious of the entire claim package when it contains obviously unrecoverable costs. In most instances, obvious “fat” in a claim is simply not valid trade-off material in a negotiation.

12.3.4. Availability of Necessary Documents and Project Personnel The determination of the negotiation bottom line should include a review of the availability of relevant documentation and of project personnel to testify should the dispute go to litigation or arbitration. Obviously, these personnel have critical knowledge and will be needed to provide their observations, understanding, and experience of the issues and events impacting the project and how costs were incurred and contemporaneously recorded. It is not unusual, however, for key project players to be assigned to other projects (or to move on to other employers) as a job nears completion. Even if the key project personnel remain employed and on the project, their ongoing project commitments often prevent them from working closely with counsel to prepare for trial. Understanding the limitations of the project record and availability, or lack thereof, of knowledgeable project personnel will assist the negotiating party to determine the negotiation bottom line by assessing the difficulties of bringing the claim to trial or hearing.

12.3.5. Ongoing Business Relationship An important consideration for any party before entering negotiations is the nature of the business relationship with the opponent. If the owner or the prime contractor (when a subcontractor is the claimant) is a regular and reliable customer of the claimant, it may, in order to maintain a good relationship, wish to settle at a much lower amount than what it believes it could obtain through litigation. If the owner has supplied years of steady work and reasonable profits, a contractor may decide that it would be foolish to jeopardize that relationship by holding out for a large claim settlement, regardless of its past or anticipated future relations with the owner. A contractor may even wish to trade off portions of its claim for consideration on future claims or additional work from the owner. On the other hand, if the claim is against a party with whom the contractor does not intend to do business in the future, a contractor may want to “hold out” for a larger settlement.

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Another element in determining the bottom line for negotiation and how hard to press it with a particular owner is whether the owner will ultimately bear the cost of the claim. If, for example, the change order or claim arose out of a design defect or unusual weather event for which the owner may seek recovery from an architect/engineer or insurer, a contractor may be less reticent about setting a higher bottom line for negotiation. If, on the other hand, the claim arose out of the owner’s misadministration of the contract and the owner must bear the entire cost, the contractor may decide to set a lower bottom line. Thus, a contractor should consider its business relationship with the opposing party while setting its bottom line and determining its strategy for the negotiations.

12.3.6. Recovery Risk Analysis There are many considerations that should be involved in a party’s determination of its negotiation bottom line. This analysis must be revisited and performed in even greater detail at the claim negotiation stage. The contractor or the owner, with the assistance of its attorney, accountant, and other experts, must attempt to evaluate the amount that can be recovered if the case is litigated to conclusion. If the claim is a simple extra-work-type claim with detailed supporting records, the claim can usually be evaluated as having a very high potential of recovery. If, on the other hand, the claim is a complicated delay/ disruption claim with scant records and falls within the purported ambit of a specific risk-allocation clause, the claim probably should be evaluated at less than 50% chance of recovery. Against the strength of the claim, of course, must again be balanced the importance of the claim to the contractor. If claim recovery is necessary to the continuation of a contractor’s business, it has no choice but to pursue it actively, regardless of the potential difficulties. If, however, the claim is not of great importance, the contractor may want to forego it or settle for a very low figure if there are perceived substantial legal impediments. Another factor to be considered during the recovery risk analysis of some claims is the precedent-setting value of the claim. Litigating a small claim that is extremely strong may establish valuable precedent that will be useful for the negotiation of larger claims anticipated to arise in the future. On the other hand, a contractor or owner may determine that it is best to negotiate a settlement of a claim to avoid setting a precedent,

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which may provide the opposing party with greater leverage in future negotiations. In this regard, it should be noted that several construction claims, especially arbitrations or disputes under federal contracts, can be litigated at various stages of performance under the same contract. Once the first claim is litigated and resolved, the prevailing party is usually in a much stronger position for future negotiations. Thus, if more than one arbitration or litigation is expected from a contract, a contractor (or the owner) should be very sure that the first claim litigated, no matter what the size, will be successful.

12.3.7. Erosion of Recovery Another element that must be considered when setting a bottom line is the value of an immediate settlement. Litigation/arbitration is both timeconsuming and expensive. Although some courts hear cases within a year, these are certainly the exception. In large, populated areas of the country, a case may be on the docket several years before it finally comes to trial. Similarly, board of contract appeals cases, although they can be tried very quickly, must be briefed and a written decision rendered; this process seldom takes less than a year. Thus, in deciding whether to settle, a party must be aware of the costs and time associated with litigation and arbitration. Another evaluation that the negotiating party should make is to compare the amount that may be recovered in negotiation against the total amount that might be recovered in litigation/arbitration. The savings of potential attorneys’ fees, expert fees, administrative costs, and other expenses may be considered to increase the value of a potential negotiated settlement. By contrast, these costs of litigation/arbitration decrease the value of a recovery through litigation/arbitration. The party also should consider what use could be made of the money that will be recovered or paid in the settlement in the meantime. For example, the negotiated settlement could (1) prevent borrowing at high interest rates, (2) be used to expand bonding capacity and thus win new contracts, or (3) be put into profitable investments. Thus, the party must consider whether additional amounts might be earned from the settlement proceeds during the time it would take to litigate the case. If the settlement proceeds, plus the amount of money that could be earned on them and the expenses saved by avoiding litigation, come close to the amount that could be recovered in litigation, the obvious conclusion is to settle. The

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negotiating party should always make this comparison. A relatively small settlement amount, if properly used, could result in a contractor being in a more beneficial overall financial situation than if the case was litigated to conclusion. The potential to recover interest is another consideration. If prejudgment or Contract Disputes Act interest is not available, the value of a recovery following litigation must be reduced by the lost value of that money. Thus, the value of the award may be reduced substantially if litigation is a lengthy process.

12.3.8. Forum for Resolution A negotiating party also must evaluate realistically the forum in which the case will be resolved. Validity of Claim under Applicable Law Generally, a construction contract, whether for a public or private project, will contain a provision that identifies the substantive law under which a claim will be decided. Whether that law consists of administrative decisions and federal case law or state common law, a negotiating party, along with his or her counsel, should evaluate whether the claim to be negotiated is recoverable under the applicable law. The law—and therefore the potential value of a claim to be negotiated—may vary widely from state to state. For example, in Florida and North Dakota, the courts have interpreted notice provisions strictly on public contracts and have barred claims where contractual notice is not provided.8 By contrast, New York and Nevada courts have taken a more liberal view of the provision of timely and sufficient notice.9 A number of jurisdictions, including North Carolina, Georgia, and New Jersey, will enforce a “no damages for delay” clause where the language of the clause is clear and unambiguous,10 while California, Oregon, Colorado, Missouri, and Virginia11 have enacted legislation mandating that such clauses are unconscionable and therefore unenforceable on public contracts. Time of Resolution The time within which a claim can be resolved varies greatly from locale to locale. A contractor with an affirmative claim would obviously want to proceed to trial as soon as possible. On the other hand, an owner

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defending a suit in which he is reasonably sure that he will be required to pay some amount may want to defer a resolution until the last possible moment. Willingness of Forum to Award Large Amounts In certain locales, obtaining a large money judgment is very difficult. This is due to either the remoteness of the forum, the relative wealth of the citizens, or a cultural unwillingness to reward litigants. Accordingly, when considering negotiation versus other forms of dispute resolution, negotiating parties should investigate whether local judges and juries in the applicable forum are likely to make a large award to meet the expected claim recovery. Recoverability of Attorneys’ Fees Another major consideration is whether attorney’s fees and expenses will be recovered as part of a negotiated settlement or if the claim is resolved in litigation/arbitration. Under the “American Rule,” each litigant bears his or her own attorney and consultant fees; however, there are exceptions to that rule that allow the prevailing party to recover attorney and consultant fees from the opponent. One exception to the rule allows parties to provide, by contract, for recovery of attorneys’ fees by the prevailing party. Although there is a split in authority as to the validity of a contract provision providing for attorney and consultant fees, the rule in most jurisdictions is that such a provision is valid if the contract is enforceable and not against public policy or another statutory enactment to the contrary.12 If the contract contains a fixed sum or percentage constituting the fee, it will be enforced if the fee is reasonable and the services were actually rendered.13 By contrast, some jurisdictions have held that contractual provisions for attorneys’ fees are penalties and against public policy and have refused to enforce them.14 Arbitration The Federal Arbitration Act is silent regarding an arbitrator’s authority to award attorneys’ fees. Nonetheless, in light of the federal policy favoring arbitration, arbitrators have been granted broad authority to fashion arbitration awards.15 Moreover, the American Arbitration Association (AAA) has provided arbitrators broad authority in its rules

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to grant attorneys’ fees as part of an arbitration award. For example, the Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes) (the “AAA Construction Rules”) authorizes the arbitrator to “grant any remedy or relief that the arbitrator deems just and equitable and within the scope of the agreement of the parties. : : : ”16 The AAA Construction Rules also specifically authorize arbitrators to award attorneys’ fees “if all parties have requested such an award or it is authorized by law or their arbitration agreement.”17 Cost-Plus Federal Contractors Under the Federal Acquisition Regulation (FAR),18 a contractor may recover attorneys’ fees if the fees were incurred as a “contract administration cost.” However, once a contractor adopts a “litigation stance” and begins preparation to pursue a claim against the government, attorneys’ fees are classified as costs “incidental to the prosecution of a claim” and are no longer recoverable. Under this rule, a contractor may recover attorneys’ fees and costs incurred for preparation for negotiations with the government.19 Equal Access to Justice Act The purpose of the Equal Access to Justice Act (EAJA)20 is to provide relief to small business litigants who otherwise might be deterred from seeking review of, or defending against, unreasonable government action because of the expense of litigation and the “greater resources and expertise of the United States.”21 EAJA provides that, unless prohibited by statute, a court has the discretion to award reasonable fees and expenses of attorneys to the prevailing party in any civil action brought by or against the United States or any agency or any official of the United States acting in his or her official capacity.22 Moreover, EAJA requires a court to award attorneys’ fees, unless otherwise prohibited by statute, to an otherwise eligible prevailing party in any civil action brought by or against the United States unless the position of the United States is “substantially justified” or special circumstances make an award unjust.23 EAJA requires that a number of criteria be met before attorneys’ fees can be awarded to a prevailing party. One of the first things to be determined is whether the party to whom an award is to be made meets certain other criteria, in addition to prevailing.24 Secondly, in order to be

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eligible for an award under EAJA, a party must be an individual whose net worth does not exceed $2 million or an owner of an unincorporated business or any partnership, corporation, association, unit of local government, or organization, the net worth of which does not exceed $7 million and which has no more than 500 employees.25 Another factor to be determined is whether the position taken by the United States in the case was “substantially justified” or whether there are special circumstances that make an award of fees unjustified. The boards of contract appeals have held that a contractor can recover attorneys’ fees even though the case settles prior to a final resolution.26 Similarly, attorneys’ fees incurred in the negotiation of quantum after a Board of Contract Appeals’ favorable decision on entitlement are part of the adversarial process and thus are recoverable.27 In situations where a contractor is only partially successful (i.e., the contractor prevails on some but not all of its claims), the court or board may apportion the claim for attorneys’ fees.28

12.4. Preparation for Negotiations Having decided to negotiate and set the bottom line, the work to prepare for the negotiation is still far from complete. Among other things, proper preparation for the negotiation of a construction claim includes selecting the proper negotiator or team of negotiators, understanding the opponent, and—most importantly—establishing a negotiation strategy. Indeed, careful and thorough preparation serves the negotiating party far better than any bargaining-table tactics.

12.4.1. Select a Winning Negotiating Team At an early stage of preparation, the negotiating party should identify the individual or team who will conduct the negotiations. Selecting a sole negotiator or a team has different advantages. On the one hand, selecting one knowledgeable individual to conduct the negotiation ensures that disagreements over facts or strategy that may occur when a team is involved will not sidetrack the negotiation. The sole negotiator may also be able to plead ignorance if the opponent raises a significant weakness in the claim. During a recess in the discussions, the negotiator may consult with other knowledgeable personnel to determine the best

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answer or adjust the negotiating strategy. On the other hand, a negotiating team, including personnel able to address all aspects of the dispute, may be the better choice for the negotiation of a complex or highly technical claim. While the negotiating team should include the individuals necessary to address any issues that arise during the negotiations, several important considerations to keep in mind when selecting the team include • Balancing the benefit of including project personnel with an intense emotional connection to the claim or a deteriorated working relationship with the opponent against their detailed knowledge of the relevant events or the technical aspects of the claim. A team member who is angry, unreasonable, or disrespectful to the opponent, or who takes any opposing view as a personal attack, will create a hostile atmosphere that is counterproductive in the negotiations. • Selecting the team to include those who are necessary to address the claim issues, but always being mindful of the anticipated size of the opponent’s team. A significant imbalance in the size of the negotiating teams may create a feeling of being overmatched in the smaller team that will inhibit open discussion and resolution. • Determining whether the opponent will appoint an attorney to lead the negotiation or even participate as part of the team. If so, the negotiating party will almost certainly want to invite its own counsel to attend and assist during the negotiations. Otherwise, the decision to inject lawyers into the process should be made carefully because it typically implies escalation and change of the negotiations to a more adversarial tone.

Prior to the negotiations, the negotiating team should select a spokesperson who will make all offers, respond to the opponent, and generally conduct the negotiations. The spokesperson may or may not be the team member with the authority to make the final decision to settle. However, only the spokesperson should communicate with the opponent during the negotiations. Having more than one person communicate offers and responses lessens the force of the company’s position.

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12.4.2. Develop Your Strategy Before going into the negotiation meeting, establishing a strategy is important—the framework from which the topics to be negotiated will be approached. The following points are stressed by the Construction Contract Negotiating Guide: • Establish objectives and how to obtain them: ○ Which objectives cannot be compromised under any circumstances? ○ Which can be compromised and to what extent? ○ Which ones are expected to be compromised or dropped totally (pie in the sky)? • Ensure that strategies are flexible (plan alternate strategies in case the primary strategy has to be abandoned).29

Proper preparation also means assembling all necessary data and documents required to support the contractor’s position in the negotiation sessions. Most of these data are probably already included in the claim document, but additional substantiation that might be useful for the presentation of the claim—including PowerPoint slides and comparison charts—should be brought to the meeting. Determine the desired order of the discussions during the negotiations. Some claims should be negotiated by discussing the strongest sections first. In this way, the strongest portions of the claim may be used to convince the opponent of the validity of the weaker parts. At other times, the negotiating party may wish to test the attitude of the opponent or display its own reasonableness by first discussing the weaker portions of the claim. Strategy development also should include a discussion of the parties’ relative leverage. The parties’ bargaining positions dictate which party will negotiate from a position of strength. More than one potential area of leverage exists. For example, an owner usually is in the stronger position in terms of economic power. This may influence the process by allowing the owner to stall to weaken the contractor’s will and financial ability to continue. The contractor’s leverage may lie in the strength of the claim, the ability to recover prejudgment or Contract Disputes Act interest or attorneys’ fees, or the ability to retain more experienced counsel.

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12.4.3. Understand the Opponent Along with an understanding of the issues involved in a claim dispute, the negotiator will benefit from understanding his or her opponent. Many factors may affect an opponent’s bargaining position or indicate an opponent’s assessment of his or her bargaining position, such as • What is the opponent’s financial position? • What is the opponent’s ability to withstand prolonged negotiations? • What is the opponent’s history of negotiating prior claims to resolution? • How will the opponent defend the claim? Factual/legal defense? Claims of fraud? • How willing is the opponent to litigate/arbitrate claims? • Is this the right time to negotiate? Are there budgetary cycles, fiscal years, or other issues that will affect the negotiation? • Is there schedule pressure to complete the project and resolve all claims that will affect the negotiation? • Are there cultural or religious factors that may affect the timing or manner of negotiations? • Who is the lead negotiator? What is his or her position within the opponent’s company? Reputation? Seniority? Temperament? • Does the negotiator/negotiating team benefit in any way from settling this claim at a certain amount? • Will the opponent focus seriously on the dispute before litigation/ arbitration is initiated? • What is the relationship between the opponent’s negotiator(s) and our negotiator(s)? Cordial? Hostile? • Who will have the authority to make the final decision to settle? Will that individual attend the negotiation?

Obviously, the strengths and weaknesses of the facts and legal arguments in support of and against the claim generally play the most significant role in determining whether and how the parties resolve a claim. However, understanding the opponent, how he or she will approach the negotiation and any soft spots in his or her negotiating position should not be overlooked.

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12.5. Other Considerations 12.5.1. Confidentiality The general rule is that offers to compromise or settle a disputed claim are confidential and will not be admitted into evidence in litigation against the party making the offer. Thus, for example, the courts will not admit into evidence a party’s offer to pay sums of money, perform certain work, or deliver certain property made during settlement negotiations. Such offers are not considered admissions by a party because they are made to avoid controversy and to save the expenses of vexatious litigation.30 The most-cited reason for this rule is that public policy favors encouraging parties to settle disputes out of court. Note, however, that every statement made during negotiations may not be protected against admission during a later litigation/arbitration. A specific and independent admission of fact made during the course of settlement negotiations is admissible. For example, courts have held that admissions of liability made by parties during negotiations for settlement of a lawsuit are admissible in evidence.31 Little uniformity exists among jurisdictions regarding how and when a court will determine whether a statement of fact or liability will be considered “independent” of an inadmissible offer of compromise. Therefore, negotiating parties should be certain to agree, in writing, that all discussions during the negotiation will be considered confidential and inadmissible in any later litigation/arbitration of the dispute. Even if such a confidentiality agreement is reached, the negotiating party must remember at all times that the purpose of the discussions is negotiation, not confession. Discussions of weaknesses in the party’s position or admissions of liability are to take place internally among the negotiating team to determine and agree upon the next offer to be made in session with the opponent. The most prudent course for the negotiating party, however, is to consult knowledgeable counsel to obtain an understanding of the applicable law in its jurisdiction.

12.5.2. Authority Requiring the opponent to have someone participate in the negotiation with the authority to make a final agreement that is binding on the opponent is absolutely critical. Often, parties will agree that the

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individual with authority need only be available by phone. Sometimes, this is the best that can be done, but negotiating to a successful result when the decision maker is not in the room is much less effective and sometimes impossible.

12.5.3. Good-Faith Conduct The personal and corporate ethics of the negotiator(s) and their companies are important to the success of the negotiation. Implicit in all successful negotiations is the duty of the parties to negotiate in good faith. Misrepresentation of facts, exaggeration of claims, unwillingness to hear and consider the valid claims/defenses of the opponent, or other attempts to deceive the opponent will only prove detrimental in the long run. Reaching resolution of complex construction claims is already difficult. If one party cannot trust the other because of a reputation for inflating claims or cheating contractors, the task becomes much more difficult.

12.5.4. Stalling and Delays Getting the owner to the negotiation table can be a chore in itself. Not giving the owner any excuse to delay the negotiations is important. The claim should be as complete as possible and submitted as early as possible. If not provided in the contract, meet with the owner and negotiate a timetable for submission of the claim and for the commencement of negotiations. Failure to negotiate may be a breach of contract;32 therefore, the contractor should maintain contact with the owner to ensure that the negotiations take place. With complex claims and difficult negotiations, the contractor should demand a schedule to ensure that discussions remain continuous until a settlement is reached. When negotiating, loss of momentum will do more harm than good.

12.5.5. Wise Use of Leverage In his article “Top 10 Mistakes Made in Project Negotiations,” Joseph A. Lukas identifies “misusing power” as one of the most serious mistakes that a negotiating party can make.33 Lukas defines “power” or leverage as “the ability of the negotiator to influence the behavior of an opponent” and identifies the following as types of power: (1) ability to tolerate uncertainty, (2) time, and (3) negotiation skills.34 A negotiator who is unable to tolerate uncertainty or who is impatient may seek to rush to the

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end of the negotiation by making an offer that is too high at the beginning of the session or by making ill-advised concessions to reach a final agreement.35 A negotiator with training and experience as a negotiator, however, will have leverage over an opponent lacking such skills. The most important takeaway, however, is that power or leverage should always be used wisely.36 J. Paul Getty attributed the following wisdom to his father, “You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.”37 Using power to force a bad deal on the opponent may result in unintended consequences, including the loss of a key business relationship or the ability to resolve change orders or other disputes on the project.

12.5.6. Listening A successful negotiator must come to the table with an open mind and a listening ear. Indeed, the danger of the careful preparation recommended in this chapter is that the negotiator will approach the discussions believing that he or she already knows how the opponent will present or defend the claim and that he or she understands the opponent’s strategy and can predict exactly how the negotiations will proceed. The problem with this approach is that the negotiator may fail to listen (and watch) and will miss useful information the opponent provides in his or her argument—or even his or her body language. A successful negotiator must listen carefully during the negotiations to learn and understand the opponent’s position and to derive as much information as possible about the opponent’s strategy.

12.6. Bargaining-Table Tactics In Getting to Yes—Negotiating Agreement Without Giving In,38 the authors describe the concept of “principled negotiation,” which contemplates a process during which the parties attempt in good faith to understand the opponent’s position and then work together to resolve the dispute based on the merits of their respective positions and with the goal of reaching a mutually acceptable resolution. Unfortunately, negotiations often are not cooperative working sessions. Rather, these negotiations become fights to the finish.39

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Many books, articles, and other sources are devoted to the discussion of tactics that one can employ at the bargaining table to gain the advantage in the negotiations. Bargaining-table tactics have a time and place; however, such tactics should be used with discretion and great care. Most importantly, many negotiating styles and tactics exist. The negotiator should adopt the negotiating style that is most suited to his or her skills and personality and use only those tactics that will be effective based upon his or her knowledge of the opponent. The following are just a few of the most widely used tactics employed in negotiations: • Injecting long silences in response to questions or points raised by the opponent; • Demanding a corresponding concession whenever making a concession; • Responding with controlled anger when the opponent makes an offer perceived to be inadequate; • Controlling the pace of the negotiations with recesses or by claiming that you have an early plane to catch; and • Threatening to walk, or actually walking, out of the negotiations when you believe that the opponent will try to stop you, or you believe that you are at the end of any profitable discussions.

The thesis of this chapter is that success in negotiations most often results from preparation through an understanding of the strengths and weaknesses of the claim or defense, knowledge of the opponent, and a detailed cost-to-benefit analysis of pursuit of the claim through litigation/arbitration. Bargaining-table tactics have their place, however, and may be useful if the tactic employed fits the natural personality and style of the negotiator and the negotiation strategy, and is calculated to move the negotiations forward.

12.7. Memorializing the Deal 12.7.1. Prepare a Term Sheet The negotiation was a success, and now a deal exists. Before celebrating or catching planes to return home, the most important thing that the parties must do is to draft and execute a term sheet. The term sheet is not

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the change order or detailed settlement agreement that the parties will review and revise over several drafts during the coming weeks. Rather, the term sheet is the statement of the specific agreements (or terms) reached during the negotiation (i.e., the amount to be paid and by whom, the time for the payment, and whether the contract will be extended and by how much).40 In short, if the parties are unable to draft and sign a simple, written statement of the terms of the agreement they just reached, the deal does not exist. Parties that draft and execute a term sheet before leaving the negotiation avoid watching their “agreement” disintegrate because one party claims confusion or argues for a differing interpretation of a key term, or because the other party reconsiders the agreement overnight and demands to reopen the negotiations. The term sheet is likely to be handwritten and will certainly not be as thorough and detailed as the ultimate settlement agreement. But, the term sheet is a written statement of the key terms of the agreement executed by both parties, and therefore, is a contract that is enforceable in court.41

12.7.2. Reserve the Right to Pursue Unresolved Claims It is beyond the scope of this chapter to discuss the numerous considerations involved in drafting and executing change orders, settlement agreements, and releases. Nonetheless, the timing of the settlement, the relationship of the parties, the nature of the dispute, and the finality of the settlement will dictate the appropriate method to document a settlement. The parties to any settlement agreement must consider at least two general principles. At the very least, the parties must include a release of those disputes that have been resolved. The parties also should consider whether to reserve the right to pursue any dispute or claim that the settlement does not expressly resolve. The legal principle of accord and satisfaction will prevent the reopening of a claim or dispute that has been resolved in negotiation. The process of accord and satisfaction occurs when parties to a contract undertake to settle a claim about which a dispute exists. Specifically, an accord is an agreement in which one party performs something in settlement of the other party’s claim and in which the other party accepts the settlement in place of what he or she otherwise believes himself or herself to be entitled. Satisfaction is the performance of

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that agreement. An accord and satisfaction is binding, discharges the original demand, and bars or prevents further action related to the original claim.42 When parties have resolved a large, complex claim at the end of a project, a broadly worded release that waives and releases all claims, disputes, and damages generally is most appropriate. When parties are concluding change orders during the project, they often agree only on the direct costs for the extra work associated with individual changes. Consideration should be given to whether or not the change order is intended to include all costs, delays, inefficiencies, and impacts related to any particular change event or to the cumulative effect of changes on the project. Contractors and owners typically agree to a price for the extra work associated with individual changes. When negotiating the price for each change order, any owner naturally seeks closure regarding the cost and impact of the extra or changed work. Therefore, owners generally seek to obtain closure by having the contractor execute a broad release of any and all costs and impacts related to the change as part of the contract modification. The inclusion of a broadly drafted release, however, will limit a contractor’s ability to make further claims. For example, a release that waives “all claims for delays and disruptions resulting from, caused by, or incident to such modifications or change orders” is likely sufficient to bar subsequent cumulative disruption and delay claims.43 On the other hand, the contractor must consider whether the individual change will cause delays or lost productivity on the project or whether the individual change, when considered along with all other changes on the project, will result in delays and inefficiency. When executing a change order, the contractor must expressly reserve its rights to recover delay, disruption, inefficiency, or cumulative impact costs arising out of the change order in order to later recover those costs.44 Reservations of rights for specific claims must be clearly stated.45 In any case, negotiating parties should consult counsel regarding the appropriate terms to include in change orders and settlement agreements, including the proper language to include to the extent that the settlement is not intended to resolve or release potential or existing claims or disputes between the parties.

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12.8. Conclusion Attempting to resolve disputes through negotiation benefits all concerned, because it keeps alive a spirit of communication, cooperation, and mutual respect between the parties. Reaching agreements in the face of complex, technical issues; valid differences of opinion; large dollar amounts in dispute; and the mass of procurement rules and legal precedents that must be considered is difficult. This chapter argues that successful negotiations are founded on preparing carefully and gathering knowledge of the details of the claim, understanding the opponent and the objective determination of the settlement bottom line, and recognizing the cost/benefit of litigation/arbitration. If, after an earnest and good-faith attempt at negotiation, an agreement cannot be reached, the parties may pursue litigation or another ADR method. However, the lines of communication built through negotiation should be maintained so that the parties may revisit their efforts to resolve the dispute even during ongoing litigation/arbitration.

Endnotes 1. Victor Kiam, former owner of the New England Patriots and Remington, who loved its razors so much he “bought the company.” 2. Internal document of Watt, Tieder, Hoffar & Fitzgerald, LLP. All rights reserved. 3. A detailed discussion of the calculation of claim damages is beyond the subject matter of this chapter. For additional information, see, John B. Tieder Jr. and Julian F. Hoffar, Proving Construction Contract Damages (Federal Publication, Inc., Washington, DC, 1983) (updated to reflect developments in case law and statutes). 4. 31 U.S.C. § 3729. Recently enacted legislation has broadened the scope of the False Claims Act’s applicability. See Fraud Enforcement and Recovery Act of 2009 (FERA), Pub. L. No. 111-21, § 4(a), 123 Stat. 1617, 1621-23 (2009). 5. 41 U.S.C. § 604 (requiring the contractor that submits fraudulent claim to pay penalty equal to the portion of the claim found to be fraudulent). 6. 28 U.S.C. § 2514 (requiring the contractor to forfeit the entire claim, including any meritorious portions, if any portion of the claim is fraudulent). 7. Morse Diesel Int’l v. United States, 74 Fed. Cl. 601, 625-34 (2007) (holding that the contractor forfeited numerous, unrelated claims where the contractor failed to disclose that it had received discounts on bond premiums but had charged the government full price).

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8. Byron’s Constr. Co. v. North Dakota State Highway Dept., 448 N.W.2d 630 (N.D. 1989). 9. U.S. ex rel. Evergreen Pipeline Constr. Corp. v. Merritt-Meridian Constr. Corp., 890 F. Supp. 1213 at 1220 (S.D.N.Y. 1995), aff’d, 95 F.3d 153 (2nd Cir. 1996); Eagle’s Nest Limited Partnership v. Brunzell, 699 P.2d 714 (1983). 10. APAC-Carolina, Inc. v. Greensboro-High Point Airport, 431 S.E.2d 508 (N.C. App. 1993); Atlanta Economic Dev. v. Ruby-Collins, Inc., 425 S.E.2d 673 (Ga. App. 1992); Edwin J. Dobson, Jr., Inc. v. State, 526 A.2d 1150 (N.J. Super. Ct. App. Div. 1987). 11. California Public Contract Code § 7102 (1987); Oregon’s Revised Statute § 279C.315 (2005); Colorado’s Revised Statute § 24-91-103.5 (1989); Missouri’s Revised Statute § 34.058 (1990); Virginia Code Ann. § 2.2-4335 (2001). 12. United States ex rel. Micro-King Co. v. Community Science Technology, 574 F.2d 1292 (5th Cir. 1978). 13. Architectural Resources, Inc. v. Rakey, 912 S.W.2d 676, 681 (Mo. Ct. App. 1995); Williams Enters. v. Sherman R. Smoot Co., 938 F.2d 230, 236-37 (D.C. Cir. 1991); Clevert v. Jeff W. Soden, Inc., 400 S.E.2d 181 (Va. 1991); Tang How v. Edward J. Gerrits, Inc., 756 F. Supp. 1540 (S.D. Fla. 1991), aff’d, 961 F.2d 174 (11th Cir. 1992). 14. Missouri Pac. R.R. Co. v. Winburn Tile Mfg. Co., 461 F.2d 984 (8th Cir. 1972). In First Atl. Bldg. Corp. v. Neubauer Constr. Co., 352 So. 2d 103 (Fla. Dist. Ct. App. 1977). 15. But see, Lee v. Smith Barney, Harris Upham & Co., Inc., 626 So. 2d 969 (Fla. Dist. Ct. App. 2d Dist. 1993) (in Florida, the arbitration statute provides that the resolution of attorney-fee demands are excluded from the arbitrator’s authority and that such fees are recoverable only in trial court upon a motion for confirmation or enforcement of the award). 16. Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes), Rule 45(a). 17. Construction Industry Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Construction Disputes), Rule 45(d)(ii). 18. 48 CFR 31.205-33 19. In re Appeal of Bath Iron Works Corp., ASBCA No. 54544 (2006). 20. Equal Access to Justice Act, 28 U.S.C. § 2412. 21. Pub. Law No. 96-481, 94 Stat. 2325 (1980). 22. 28 U.S.C. § 2412(b). 23. 28 U.S.C. § 2412(d)(1)(A). 24. Id., at pp.22–23. 25. 28 U.S.C. §2412(d) (2) (B). 26. PetroElec Constr. Co., Inc., ASBCA Nos. 32999, et al., 873 BCA ¶ 20,111 at 101,841 (1987). 27. B & A Elec. Co., Inc., ASBCA Nos. 28649(R), 30721(R), 87-2 BCA ¶ 19,879 (1987). 28. T.H. Taylor, Inc., ASBCA No. 26494-0, 83-1 BCA ¶ 16,310 (1983). 29. Construction Contract Negotiating Guide, Department of the Army, at p. 83. 30. West v Smith, 107 U.S. 263, 25 L.Ed. 809 (1879); Federal Rules of Evidence 408. 31. Charter Oak Fire Ins. Co. v. Adams (Tex Civ App) 488 SW2d 548, Fenter v. Norfolk Airport Authority, 649 S.E.2d 704 (Va. 2007). 32. Christopher J. Brasco, Esquire, and Adam Tuckman, Esquire, “When the Federal Government’s Hard Line Claim Negotiations Are also a Breach of Contract,” From the Ground Up, Spring and Summer 2013—for download, go to www.wthf.com.

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33. Joseph A. Lukas, PE CCE, “Top 10 Mistakes Made in Project Negotiations,” Cost Engineering Magazine, September 2011, pp. 19–25. 34. Id., at p. 22. 35. Id. 36. Id. 37. Quoted in Getty on Getty (Somerset de Chair, 1989), ch.2. 38. Fisher R. and W. Ury, Getting to Yes—Negotiating Agreement without Giving In, Penguin Books, New York, 1991. 39. Joseph A. Lukas, P.E., CCE, “Top 10 Mistakes Made in Project Negotiations,” Cost Engineering Magazine, September 2011. 40. The term sheet also should state that it is the entire agreement of the parties regarding the subject matter of the negotiations. 41. Hogan Family Enters. v. Town of Rye, 951 A.2d 159, 163 (N.H. 2008) (holding that a settlement agreement reached during trial and reviewed with the trial court in its preliminary form should not be rendered unenforceable based on the statute of frauds or lack of definiteness where the essential terms of the agreement were laid out and the parties assented to those terms); see also Facebook, Inc. v. Pacific Nw. Software, Inc., 640 F.3d 1034 (9th Cir. 2011) (preliminary “Term Sheet & Settlement Agreement” enforceable in light of failed negotiations on final form of documentation); HL 1, LLC v. Riverwalk, LLC, 2011 ME 29, 15 A.3d 725 (Me. 2011) (negotiated memorandum of understanding enforceable); Targus Grp. Intern., Inc. v. Sherman, 76 Mass. App. Ct. 421, 922 N.E.2d 841 (2010) (“Agreement in Principle” was enforceable and no conditions present). 42. Shirazi v. United Overseas, Inc., 354 N.W.2d 651 (N.D. 1984); Rockingham Square v. Integon Life Ins. Corp., 52 N.C. App. 633, 279 S.E.2d 918 (1981); Archibald McNeil & Sons Co v. U.S., 1 F.2d 39 (E.D. Pa. 1924), aff’d, 10 F.2d 1016 (C.C.A. 3d Cir. 1926); Geeslin v. Knight Bros., Inc., 554 F.2d 865 (8th Cir. 1977); Bank United of Texas FSB v. US, 49 Fed. Cl. 1 (1999), aff’d, 80 Fed. Appx. 663 (Fed. Cir. 2003), cert. denied, 125 S. Ct. 33 (U.S. 2004); Koretz v. All Am. Life & Cas. Co., 102 Ill. App. 2d 197, 243 N.E.2d 586 (1st Dist. 1968). 43. See, Atlantic Dry Dock Corp. v. United States, 773 F. Supp. 335, 338-39 (M.D. Fla. 1991) (finding that this language was open to only one interpretation: that the parties to the release provision intended to resolve all claims for damages caused by delay and disruption, whether cumulative or otherwise). 44. Whiting-Turner Contracting Co., ASBCA No. 56319, 10-1 BCA ¶ 34,436 (inclusion of “any and all costs” language in change order releases when combined with the absence of reservations of rights barred subsequent delay or impact claims even though those elements were not discussed in the proposals or negotiation of the changes); Valenzuela Eng’g, Inc., ASBCA Nos. 54939, 55464, 08-1 BCA ¶33,801 (specific reservation of right stated in the contractor’s letters served as an exception to the general release language contained in subsequently issued contract modification); Colorado River Materials, Inc., ASBCA No. 57751, BCA ¶35233, 2013 WL 603641 (Feb. 4, 2013) (release was deemed to be unambiguous and the board refused to consider extrinsic evidence to interpret it); Troy Eagle Grp., ASBCA 56447, 2013 WL 1131416 (Mar. 4, 2013) (release was conditioned upon payment, and payment was not made; board refused to enforce release). 45. Fid. and Guar. Ins. Co. v. Star Equip. Corp., 541 F.3d 1 (1st Cir. 2008).

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Chapter 13

Dispute Avoidance and Alternative Dispute Resolution Adam K. Bulta, David W. Halliganb, Jonathan Prayc, and James G. Zack Jr.d

13.1. Introduction1 Construction industry disputes are common, and the amounts in dispute are frequently quite large. Additionally, construction industry disputes are often quite complex, thus making it difficult to present issues clearly to nontechnical triers of fact. Until the late 1980s, the traditional dispute resolution process involved negotiation and some form of administrative appeal, possibly mediation, followed by either arbitration or litigation. As a result, the construction industry has developed alternative means of resolving disputes. Alternative dispute resolution (ADR) has become common in construction.2 Through the parallel pioneering efforts of public agencies and construction trade associations, numerous ADR techniques have been developed and implemented, all with the end goal of resolving disputes without resorting to traditional, time-consuming, and expensive litigation. This chapter summarizes nearly 30 forms of ADR techniques used in the construction industry. a

Shareholder, Brownstein Hyatt Farber Schreck. Associate Director, Global Construction Practice, Navigant Consulting. c Shareholder, Brownstein Hyatt Farber Schreck. d Executive Director, Navigant Construction Forum. b

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Some are merely variations on a theme, but all differ and have advantages and disadvantages to consider prior to selection. The various forms of ADR are presented in what the authors believe is a logical order following a dispute from the project site to the adjudicative forum.

13.2. Predispute ADR Methods Several ADR methods can be put in place during the planning and preconstruction phases of a project. In addition to minimizing and avoiding disputes by practicing sound contract administration, discussed in earlier chapters, contractors and owners can take advantage of new practices developed in the construction industry. Several programs and concepts have evolved to resolve claims on a somewhat informal basis through early cooperative intervention. These programs include • • • • •

Escrow bid documents, Delegation of authority, Dispute resolution ladder, Geotechnical design summary reports, and Partnering.

Although somewhat interdependent, these programs and concepts can be applied independently to improve cooperative construction efforts and dispute resolution.

13.2.1. Escrow Bid Documents Escrow bid documents (EBD) is a form of ADR in that it provides for resolution of some disputes quickly and at low cost. It is not a new process, having been recommended to the industry in the early 1990s.3 The EBD process requires the apparent low bidder to provide all worksheets, backup, and documents relied upon in preparing its bid to the owner shortly after bid opening (typically within 24 to 48 hours) as a condition precedent to contract award. The owner and bidder jointly review the document package. The owner’s review determines that all documents submitted are readable. The contractor’s review, however, ascertains that everything relied upon during bidding is actually

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contained in the document package, because the typical EBD clause in the contract states that any bidding document not included in the EBD package shall not be used or relied upon in any claim or dispute related to the project. The EBDs are not to be used for preaward evaluation of the contractor’s methods or to assess the contractor’s qualifications. The information contained therein is considered a trade secret, and its confidentiality is to be protected as such. The EBDs are returned to the contractor, uncopied, at the end of the project as they are and remain at all times the contractor’s property. Once the contract is awarded, the documents are escrowed with a neutral third party (a local bank or trust agent) for safekeeping. An escrow agreement is established concerning who can access such documents, the privacy and confidentiality of the documents, who pays for the storage of the documents, etc. The EBDs are referred to and examined only in the event that such documents would assist in pricing a change order or a disputed issue involves how an item was bid, what interpretation was relied upon during bidding, what productivity factors were used in preparing the bid, etc. In this way, critical project documentation is preserved in the safekeeping of a neutral third party and referred to when such documents will aid the parties in resolving particular issues in dispute. The advantages of EBDs are that bidding documentation that may help resolve issues is captured, secured safely, and made available for use in the event of a dispute at a somewhat low cost. Further, the mere existence of such EBDs may help prevent spurious claims from arising on the basis of “I bid it this way, and your way will cost more.” Any time such a statement is made, the party receiving the statement is within its rights to request immediate access to the EBD to confirm the statement. Potential disadvantages of the EBD system include administrative disputes on the organization, readability, and structure of bid documents. Additionally, no matter how secure the escrow process is, inadvertent and unwarranted exposure of the contractor’s proprietary material is also a risk.

13.2.2. Delegation of Authority Experience teaches that the longer finalizing negotiations of a disputed issue and signing a settlement agreement take, the more likely the dispute will escalate, become more expensive, and thus harder to resolve. One practical method of avoiding disputes is for the owner to

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delegate a certain level of change order and claims settlement authority to the project manager level. If smaller, discrete issues can be analyzed, negotiated, and settled, and a change order or claims settlement document executed quickly and on site, then the likelihood that unresolved changes and issues will grow into a larger dispute is lower. The key to this form of early dispute resolution is to delegate sufficient authority so that a large tranche of issues can be handled on site and avoid having upper management become a bottleneck that causes unresolved issues to accumulate.

13.2.3. Dispute Resolution Ladder Another practical method of avoiding unresolved disputes is for the owner and the contractor to establish a formal, written dispute resolution ladder. This is a parallel organizational chart showing the owner and contractor counterparts (i.e., assistant project managers, project managers, project executives, etc.) along with specific time frames each level has to resolve issues. For example, if the project managers have 30 days to resolve an issue that remains unresolved, on day 31 the issue is automatically advanced to the next level. The concept is simple: assign issues to specific individuals by name and give them a set time frame. If numerous issues continue to be advanced for lack of resolution at the lower levels, management on both sides is likely to find a way to resolve this difficulty.

13.2.4. Geotechnical Design Summary Reports The geotechnical design summary report (GDSR) or the geotechnical baseline report (GBR), originally proposed in the 1970s for use in tunneling construction projects,4 has slowly spread to other types of construction. An essential part of underground construction projects, the GBR goes further than traditional site investigation reports, boring logs, and soils reports. The GBR sets forth the designer’s interpretations of subsurface conditions and their impact on design and construction. Contracts employing this ADR mechanism also typically state that the contractor has a right to rely upon the interpretations set forth in the GBR. The GBR provides a definable baseline of subsurface conditions for determining whether actual conditions encountered are materially different or not. It removes the uncertainty of how the subsurface

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conditions should be interpreted and what could be expected by a reasonably prudent contractor. Along with the designer’s description and interpretation of anticipated subsurface conditions, the anticipated behavior of the ground consistent with the specified or most likely used construction methods is also described. Such factors as slope stability, dewatering methods, pumping quantity estimates, well spacing, and so forth should be engineered and provided as part of the GBR.5 The GBR has been used successfully on numerous tunneling projects by reducing differing site condition claims and/or resolution at the project level. Its success is founded on eliminating the uncertainties surrounding a mere presentation of a subsurface survey or boring logs, with the owner taking a more proactive responsibility for the thoroughness the engineers’ and designers’ description and interpretation of the conditions.

13.2.5. Partnering Partnering, quite simply, establishes a team approach to mutually beneficial resolution of difficulties and problems that typically arise on a construction project. The Associated General Contractors of America (AGC) characterizes the partnering process as “attempts to establish working relationships among the parties through a mutually developed formal strategy of commitment and communications. It attempts to create an environment where trust and teamwork prevent disputes, foster a cooperative bond to everyone’s benefit, and facilitate the completion of a successful project.”6 Partnering is also a way for the owner, design professional, construction manager, and contractor to maintain regular communication and discuss and implement cooperative efforts. It provides an alternative to the adversarial pattern that often exists where each party crafts all communication and correspondence in ways to establish and protect its own position to the exclusion of all others. Partnering is a voluntary process and primarily consists of workshops, meetings, and the use of facilitators to help the parties establish working relationships where project problems can be discussed and resolved in a nonadversarial atmosphere. History of Partnering Partnering in public construction began in 1988 with the efforts of Larry Bodine, Commander of the Mobile (Alabama) District of the U.S. Army

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Corps of Engineers,7 later named the director of the Arizona Department of Transportation (ADOT). Since then, the Corps and other state and federal agencies—most notably many state departments of transportation (DOTs)—have successfully implemented partnering to varying degrees. Many state DOTs have implemented the partnering process on an agencywide basis and are frequently cited in articles and case studies in the construction trade press. Elements of Success The basic elements of partnering include principles and procedures that bring together the different layers of management to work together as a team. The elements include the following activities and concepts, which lend structure to the partnering process: • The preconstruction workshop is a one- or two-day meeting between key management and jobsite personnel representing the owner, contractor, design professional, construction manager, major subcontractors and suppliers, and other key stakeholders, such as local agencies or community groups. The primary objectives of the initial workshop are to (1) build teams to work with different issues that are expected during the project and (2) to develop a project charter. • The project charter is a document that defines the goals and objectives of the partnering effort for all stakeholders to sign at the end of the workshop. These goals are more than simply to complete the project on schedule and budget. They comprise specific and measurable tasks, such as no lost-time accidents, good community relationships, and development of efficient construction procedures to solve major job challenges and avoid disputes. • The commitment of top management is essential to the success of partnering. Top management of all parties must believe in the concept and stand behind commitments it has delegated to or empowered the field staff with to resolve jobsite issues. Because partnering is a cultural change for most owners and contractors, top management must remain heavily and continuously involved in the partnering process throughout the life of the project. • Empowerment is the delegation of authority and responsibility to the lowest possible levels in an organization. This allows various team members to meet, discuss, and resolve problems in a timely and

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efficient manner. The partnering process provides noncontentious procedures for escalating issues to higher levels in the event the parties cannot reach agreements within certain time frames. • Partnership maintenance comprises routine, ongoing partnering meetings (usually monthly but no less frequently than quarterly), follow-up workshops, closeout workshops, and end-of-job rewards and recognition that are essential for keeping the partnership on task and properly evaluating its effectiveness. These elements, properly implemented and practiced, have proven to foster less adversarial construction projects with more timely completion, reduced costs, and fewer claims. One study of some 280 projects indicated “ : : : that partnered projects achieved superior results in controlling costs, the technical performance and in satisfying customers compared with those projects managed in an adversarial, guarded adversarial and even informal partnering manner.”8 Obstacles to Partnering It seems counterintuitive that the parties to a construction contract, with such diverse interests, can work together in a team atmosphere. Perhaps a review of the obstacles to partnering will allow a more reasonable assessment of the tradeoffs and benefits of partnering. Culture of Construction Most obstacles to partnering lie in the history and nature of the construction process. Construction is traditionally characterized as the realm of rough-and-tumble individuals using raw nerve, brute force, and commanding presence to move earth, steel, and concrete to build the subways, dams, and skyscrapers of the world. To some of these highly independent individuals, who travel the world to build projects under their full control, participating in group partnering activities is both foreign and incongruous. Past Dealings and Nature of the Parties The three main parties to a construction contract—owner, design professional, and contractor—represent completely diverse entities, each with its own role and personality. The owner is the provider of the project, the source of funds, and typically the most passive and removed party in the process. The owner

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has an established budget and a contractual project completion date and wants an end product meeting its exact needs. Owners are frequently not interested in the details of the project and are often inexperienced with the complexity and risks of the construction process. The owner wants neither to be involved in day-to-day problems nor to spend extra money. The owner wants the end product on time, within budget, and in conformance with the plans and specifications. The design professional is the architect or engineer responsible for designing the project and putting together the plans and specifications for its successful execution. The designer typically works under a negotiated fixed fee or cost plus contract and works in typical white collar office conditions. The contractor is the party responsible for executing the plans and specifications to build the project. Construction is often seasonal and, within seasons, deals with varying degrees of daylight hours, diverse weather conditions, and unpredictable factors such as unexpected site conditions and external economic conditions. Contractors frequently must travel to where the work is, work with unknown local labor and resources, and deal with unknown local utilities and regulatory agencies. Construction is often fast paced—time is of the essence—and the contractor prefers to be at the jobsite building the project. Under these constraints, contractor employees often work long hours under demanding conditions. Both companies and their employees undertake this extra work and risk in return for larger financial rewards and the enhanced satisfaction of successful job completion. The ideological differences among these parties, along with the potential for coordination conflicts in both scheduling and participation levels, can clearly make implementing partnering efforts difficult. Nevertheless, once employed, partnering efforts can help overcome these difficulties and provide multiple benefits to the construction project and all stakeholders. Results of Partnering Successful participants in numerous partnered projects consistently cite favorable tangible results of partnering: • Increases in projects completed on or ahead of schedule, • Improvements in contract administration procedures, • Reductions in claims,

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• Reductions in owner’s engineering and administrative expenses (often 5 to 15% or more), and • Increased value engineering.

Partnering can create a sense of teamwork and result in a productive use of time. The energies and creative efforts of the parties are better used in value engineering and mutually beneficial schedule improvements rather than writing letters and being involved in contentious claims endeavors. For both the owner and the contractor, needing employees to divert energies from new and future projects to return to old projects for claims preparation, depositions, litigation support, and trials is extremely disruptive, draining, and counterproductive. To learn more about the details of partnering efforts, Partnering for Success by Thomas R. Warne is strongly recommended.9 Also check with major trade associations, such as Associated Builders and Contractors, the AGC, and the Construction Industry Institute for other publications on partnering.

13.3. Initial Claims and Dispute Phase Once the contract is awarded and notice to proceed issued, the contractor starts work in the field. Disagreements over potential change orders and claims10 are inevitable given the complexity of today’s construction projects. However, several ADR methods can be implemented on the project to avoid disputes that are discussed in the following sections.

13.3.1. Initial Decision Maker/Single Dispute To provide prompt review of claims submitted by the contractor and guarantee a decision within a reasonable period of time, the American Institute of Architects (AIA) General Conditions of the Contract for Construction provides for an initial decision maker (IDM).11 Similarly, the American Arbitration Association (AAA) recommends considering a single dispute resolver for smaller and less complex projects.12 Contractor claims are submitted to the IDM, who has 30 days to render a written decision. Upon receipt of the IDM’s written decision or the passage of 30 days without such a decision, the owner and the contractor may refer the matter to mediation. While the owner is likely to appoint the architect

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as the IDM, the owner is free to name anyone it chooses in the contract. The article, however, does provide that if no individual is named as the IDM in the contract, the architect assumes the role of the IDM by default. The concept is to ensure that a designated individual reviews and rules on a claim within a reasonable period of time and either helps resolve the claim or moves the claim forward to mediation.

13.3.2. Standing or Project Neutral/On-Site Neutral ConsensusDocs 200,13 Standard Agreement and General Conditions Between Owner and Constructor, Article 12, and ConsensusDocs 240, Agreement Between Owner and Design Professional, Article 9.3.1, both set forth an “optional dispute mitigation procedure” as an alternative to mediation. The owner employing this form of contract document has the option of selecting an optional dispute mitigation procedure—either a standing or project neutral14 or a dispute resolution board in lieu of mediation. The use of the neutral is not mandatory, and the owner or contractor may elect to bypass this and proceed directly to the more formal dispute resolution procedure outlined in the contract.15 However, owners who check the project neutral box do so in hopes that a neutral individual reviewing an issue professionally and objectively will be able to guide the parties to an acceptable resolution. Thus, owners who opt for the neutral are unlikely to routinely bypass this form of ADR.

13.3.3. Early Neutral Evaluation In this form of ADR, when a dispute arises and the project-level staff cannot resolve the issue, an impartial third party (either jointly selected by the parties or appointed by an external organization such as the AAA) is brought on site to listen to presentations from both sides and evaluate the conclusion of the dispute, should it go to court. The concept is that the parties learn early in the dispute how strong their cases are in the eyes of a neutral. Additionally, this early evaluation should help educate both parties on the efficacy of taking the dispute to court. Further, the neutral’s evaluation may point the way toward a negotiated settlement both parties can live with. The advantage to the system is that both parties gain insight into their positions concerning the dispute quickly and at a very low cost. This form of ADR appears to have no disadvantages.

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13.3.4. Owner/Agency Review Board Some public owners, particularly those with larger, long duration construction programs, have established their own in-house review boards to hear disputes that cannot be resolved at the project level. Such review boards are typically made up of very senior employees (or retired senior employees) of the owner’s staff. They are empaneled to review disputed issues in house in an effort to resolve such disputes, especially those caused by personality conflicts or misinterpretation of contract requirements by the owner’s staff. Such review boards are normally structured to handle appeals of lower level project decisions in a simple, informal manner. Typically, they act promptly upon the contractor’s request, although some have been known to have extremely complex requirements and be very slow to act.16 The apparent advantages of owner review boards are the ease of obtaining an appellate hearing on an adverse decision at the project level and the low cost involved with such a hearing. The most commonly cited disadvantages include the perceived lack of impartiality as the review board members are generally employees of the owner (thus creating an apparent conflict of interest), the lack of due process, the lack of timeliness (in some cases), and the difficulty of obtaining judicial review of such review boards’ findings.

13.3.5. Dispute Resolution Boards Dispute resolution boards (DRBs)—previously known as dispute review boards—are often referred to as the least intrusive and most effective ADR procedure for reducing claims and providing a timely procedure to resolve claims quickly.17 A DRB typically comprises three members, the first selected by the contractor and subject to veto by the owner, the second selected by the owner and subject to the contractor’s veto, and the third (usually the chair) selected by the first two members and subject to veto by both the owner and the contractor. The DRB is established at the outset of the project; is provided sets of drawings, contract documents, and other related project documents; and meets routinely at the site (monthly on larger projects and quarterly on smaller jobs) to monitor the progress of construction. Whenever an issue arises on a project that direct negotiations cannot resolve, either the owner or the contractor can refer the disputed issue to the DRB. The DRB will hold a hearing within a short period of time after the issue has been referred to them and render a

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recommendation concerning the issue in dispute. Unlike other forms of ADR, DRB hearings typically deal with a single issue. DRB members are most often very familiar with the type of construction involved, are respected in the industry, and approach their responsibilities neutrally and impartially.18 The U.S. National Committee on Tunneling Technology first recommended DRBs to the construction industry in 1974.19 The DRB process was first employed in 1975 during the construction of the second bore of the Eisenhower Tunnel in Colorado. This first DRB heard and successfully resolved three disputed issues to the satisfaction of the parties. The DRB process has since spread to a wide variety of owners and projects. At present, at least 14 state highway departments, 12 or more major public transit authorities, dozens of cities and counties throughout the United States, several federal agencies, and numerous universities routinely use this form of ADR in their contracts.20 Internationally, this form of ADR is also gaining in popularity and use, as discussed later. DRB Procedures The DRB board members are usually selected at the outset of a project, visit the jobsite periodically, meet with project personnel from both sides, keep current with job activities and developments through progress reports and relevant documentation, and are available to meet and hear disputes on an as-needed, as-requested basis. The prior industry experience of the DRB members and their contemporaneous familiarity with the project put the DRB in the unique position of being able to make quick, informed, and reasonable recommendations to resolve disputes at early stages. The DRB generally holds its first meeting as soon as possible after the work begins to establish the DRB ground rules and operating procedures. The frequency of subsequent visits depends on activity levels at the jobsite, but one meeting every month on large, complex, and/or contentious projects or every three to four months for smaller, less contentious jobs appears to be the norm during the more active phases of the project. In addition to routine visits, special, private meetings and hearings are held at locations selected by the DRB with the agreement of the parties. As soon as a dispute becomes unresolvable at the job level and upon request of either party, the DRB arranges a hearing. Each party provides position papers accompanied by all supporting documentation to the

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DRB (and the other party). At times, the parties may agree to jointly prepare the supporting documentation binder(s). The DRB hearing is typically held at or near the jobsite and is somewhat informal. Witnesses, experts, and other resources that might provide information helpful to the DRB in making a decision can be used in the hearings. Either party can request a DRB hearing at any time. Typically, the project participants make presentations, and no attorneys are involved in the hearing (although the parties may use attorneys to help prepare their briefs and some DRBs allow attorneys to attend the hearing but not participate). As soon as possible after the conclusion of the hearing, the DRB issues a written recommendation that clearly describes its reasoning in reaching its decision. Although desirable, unanimous decisions are not required for a recommendation. The DRB may be asked to render a recommendation on entitlement, quantum, or both. DRB recommendations are nonbinding and are intended to be used by the parties to negotiate resolution of the disputed issue. If negotiations fail, the parties are free to turn to whatever dispute mechanism is outlined in the contract. If this happens, the question of whether the DRB recommendation is admissible arises. There are arguments on both sides of this issue. However, “[i]t is believed that the substantial risk that a judge, jury, or panel of arbitrators will place great weight on the DRB recommendation deters the losing party from filing a lawsuit and taking another bite at the apple. DRB Foundation statistics and anecdotal evidence tend to support that belief.”21 DRB procedures, costs, and related issues should be concisely spelled out in a DRB clause in the contract documents. A guide specification for a DRB clause is contained in DRBF Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute Adjudication Boards, published by The Dispute Resolution Board Foundation.22 DRB Costs DRB costs include the administrative efforts of selecting the DRB members; the costs of the DRB members’ time, travel, and expenses for the periodic site visits; and the costs of additional trips and related expenses for DRB hearings beyond the regular periodic visits. Board members are typically paid a daily rate plus expenses for meetings, site visits, and dispute hearings and an hourly rate for document review and study time spent reviewing documents at home, communications, clerical work, and other nontravel expenses. Other expenses include the

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administrative costs of distributing progress reports and documentation to the DRB members. The contractor and owner share the DRB costs equally, although some DRB clauses require the contractor to pay all costs directly and include half of the cost paid in the next monthly payment application submitted to the owner under the contract. DRB Effectiveness and Success All evidence—both statistical from the DRB Foundation and anecdotal from owners, contractors, and attorneys involved in projects using the DRB process—indicates that this form of ADR is both effective and successful. Some reasons for this conclusion include the following subsections. Quick Resolution of Disputes and Reduction of Unresolved Claims The mere existence of the DRB tends to foster an environment that encourages the parties to avoid the pursuit of frivolous disputes, to resolve most disputes at the project level, and to involve the DRB only in those few disputes that reach a true impasse. Reasons for this include the following: • Members of the DRB are impartial, technically proficient, project knowledgeable, well respected, and mutually selected. The parties respect the DRB members, which discourages both parties from the possible loss of credibility associated with presenting minor or nonmeritous claims. Additionally, while preparing draft submissions to the DRB, the parties often realize that their claims are weaker than initially thought or the other party’s position is stronger, thus creating an impetus for a negotiated resolution of the issue and obviating the need for a DRB hearing altogether. • DRBs help improve the relationship between parties by creating an atmosphere of communication and trust. Knowing that disputes will be resolved expeditiously and fairly, the parties are more willing to be openly communicative and work toward a common goal—that is, settling disputes themselves whenever possible. • A DRB is simple, straightforward, fair, and efficient. The DRB members’ familiarity with the industry, the particular project, their availability, and the knowledge that the DRB will act quickly and fairly tends to reduce opportunities for posturing. Because DRBs typically hear only a single dispute at a time, the aggregation of claims is reduced.

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In sum, the existence of a DRB makes resolution of claims a top priority and reduces the list of unresolved disputes, allowing the parties to maintain their focus on construction of the project. High Resolution Rate Reportedly, DRBs have nearly a 100% success rate for resolving construction disputes: According to the DRB Foundation, which has a database of more than 1,200 projects since 1975 that have used DRBs: • 60% of projects with a DRB had no disputes (this statistic attests to the “dispute prevention” benefit that accompanies any Standing Neutral process). • 98% of disputes that have been referred to a DRB for hearing result in no subsequent litigation or arbitration. • The worldwide use of DRBs is growing in excess of 15% per year, and through the end of 2006 it was estimated that more than 2,000 projects with a total value in excess of $100 billion had used some form of DRB. • Dr. Ralph Ellis, a University of Florida civil engineering professor, has studied the use of DRBs by the Florida Department of Transportation involving more than $10 billion of that agency’s construction projects. He concluded that use of DRBs resulted in: ○ Net cost growth savings equal to 2.7% of construction costs; and ○ Net time growth savings of 15.1%. The American Society of Civil Engineers conducted a study of DRBs in the mid-1990s and found that DRBs heard a total of 225 disputes on 166 projects worth $10.5 billion. They resolved 208 of the 225 disputes and the only one that actually proceeded to litigation and was eventually settled.23

In those instances where a DRB was not able to resolve a dispute, the parties typically went on to negotiate the disputes themselves. Reiterating the previously discussed factors, this is due to the DRB members’ knowledge and experience with 1. The construction industry and this type of project; 2. The design and construction issues germane to the project;

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3. The interpretation and application of contract documents; 4. The process of dispute resolution; and 5. The specific design and construction for the project.24 Because both parties agreed to the selection of the DRB members and the process in advance of any dispute, the parties are normally favorably predisposed to DRB proceedings. DRB Cost-Effectiveness For very large projects, DRBs are extremely cost-effective because • The DRB’s existence encourages quick settlement of most changes and claims, reducing overall administrative costs and the nonproductive time of maintaining and pursuing open change order lists. In this regard, it’s considered a money and time saver, and a prevention cost, because it prevents many claims from escalating into disputes. • The disputes that do end up in front of the DRB cost far less in a DRB hearing then they would in arbitration, litigation, or board of appeal hearings.

In Dispute Review Boards and Other Standing Neutrals, a review of case histories indicates that the total direct costs of DRBs generally range from approximately 0.05% of final construction cost for a somewhat disputefree project to approximately 0.25% for “difficult projects” with several dispute hearings. The average is about 0.15% of final construction cost. The percentages cited are from case studies of projects in the range of $50 million to $100 million. Note that on projects with a value of more than $100 million, the percentage goes down, and for those projects less than $50 million, the percentage is higher.25 International Applications The movement toward DRB use has grown steadily on international projects. However, some international contracts specify the use of a dispute board (DB), which is analogous to the DRB in that DBs also issue recommendations. Other international contracts require the use of a Dispute Adjudication Board (DAB), which renders enforceable determinations subject to the formal dispute process only at the end of the project. Several groups have become involved in this movement to

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promote the use of a neutral party to resolve disputes, including the World Bank and other international development banks, the U.K. Institution of Civil Engineers, the Engineering Advancement Association of Japan, the International Chamber of Commerce, the Fédération lnternationale des lngénieurs Conseils, and the U.N. Commission on International Trade Law.26 Efforts by these organizations include drafting and promoting DRB clauses for use on international projects. The DRB Foundation reports that DBs have now been used internationally on projects in Bangladesh, Botswana, Denmark, Dominican Republic, Ethiopia, Honduras, Hong Kong, Hungary, India, Ireland, Italy, Lesotho, Madagascar, Mozambique, Pakistan, People’s Republic of China, Poland, Romania, Sudan, Uganda, the United Kingdom, and Vietnam.27 Other Considerations of DRB Procedures A DRB is still a voluntary, nonbinding method of settling disputes. DRB specifications should be written to avoid interfering with or hindering the parties’ traditional dispute resolution methods in the event a DRB recommendation is not satisfactory to both parties. For example, time taken for attempted DRB resolution should not penalize either party in regard to notice provisions of claims, requests for contracting officer’s decision, or requests for an appeal. The DRB process is compatible with the partnering process previously described. Many owners have now taken steps to incorporate both partnering and DRBs into the same projects. Smaller projects that cannot afford full-time three-member DRBs should consider a single-person DRB or seek the assistance of local persons who can function as a board without the expense of a travel budget. Other alternatives include use of a multiproject, multicontract, or some sort of standing DRB that may be set up by sponsoring trade associations.

13.3.6. Adjudication Adjudication is a compulsory dispute resolution mechanism imposed by contract that applies in the U.K. construction industry. It is, in the words on one commentator, “... an accelerated and cost effective form of dispute resolution that, unlike other means of resolving disputes that involve a third-party intermediary, results in an outcome that is a decision by a third party, which is binding on the parties in the

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dispute.”28 The adjudicator is a third-party intermediary appointed to resolve a dispute between the parties. The decision of the adjudicator is binding and final, unless it is later reviewed by either an arbitration panel or court, whichever is mandated by the contract’s disputes clause. That is, the adjudicator’s decision is “interim binding” or binding on the parties until the dispute is finally determined by legal proceedings at the end of the project, through arbitration, or by agreement. Adjudication is intended to be a condition precedent to either arbitration or litigation. Section 108 of the Housing Grants, Construction and Regeneration Act of 1996 mandates adjudication in the United Kingdom. As a result, the parties cannot waive the adjudication requirement by contract. Similar statutes have been adopted in Australia, Hong Kong, New Zealand, Singapore, and South Africa. The standard set of contracts published by the International Federation of Consulting Engineers29 (the FIDIC Rainbow Suite), used globally by the World Bank, includes adjudication and Dispute Adjudication Boards. Adjudication has been described as a “pay first, argue later” statutory mechanism for resolving disputes in the construction industry and is intended to protect cash flow in construction.30 Adjudication is a 28-day procedure (but may be extended by agreement of the parties). This has caused another commentator to refer to adjudication as “rough justice” with the comment, “[g]iven the tight time constraints, adjudication can sometimes be seen to be rough justice as the responding party may only have a matter of 2–3 weeks to prepare a defence to the claim brought against them.”31 Adjudication is almost never used as an ADR form in the United States. However, this chapter includes it because U.S.-based contractors working internationally may find they have a contractual obligation to adjudicate disputes prior to proceeding to other dispute resolution procedures.

13.3.7. Mediation Mediation is an entirely different form of ADR. It is a private, informal, and consensual submission of a dispute to a forum where a neutral third party assists the parties in reaching a voluntary settlement. Mediation is a form of facilitated negotiation into which a third party is inserted. It is a nonbinding form of ADR where the parties to the dispute are in total control of the outcome. Two variations of mediation exist. The most common form of mediation is the individual mediator. However, a

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mediation panel may be available at the request of the parties to the dispute. Mediation has gained considerable and well-deserved popularity in recent years as a form of ADR. In a typical mediation, the parties jointly select a mediator whose role is to assist the parties in reaching a mutually satisfactory resolution of the dispute. As such, the mediator does not render a decision. Instead, the mediator assists the parties in assessing their respective risks and finding areas for compromise. The parties are free to fashion their own mediation rules, and in doing so, this action actually represents the first of several agreements leading to the ultimate resolution of the dispute. The keys to successful mediation are joint commitment to “solving” a mutual problem as opposed to “beating” the opponent and a willingness to proceed in a nonadversarial mode with a genuine focus on reaching a compromise. A typical mediation model involves some or all of the following steps: 1. Advance exchange of written position papers, furnished also to the mediator; 2. Formal presentations of each party’s facts and arguments in a joint session, usually without cross-examination but with an opportunity for mediator questions; and 3. Caucus sessions in which the mediator meets privately with each party and shuttles between them attempting to find common ground, assisting in risk assessment, and expediting the movement of the parties toward compromise. The mediator moving between the parties tries to structure a settlement. Frequently, mediators offer an assessment of the positions asserted and sometimes even offer mediator recommendations. The concept is that the mediator assists the parties in creating their own resolution rather than rendering a decision. The advantages of mediation are that it is inexpensive, requires a small investment of time, is nonbinding, and is both private and confidential. (In fact, most mediation settlements contain a strict confidentiality clause of nondisclosure agreement concerning the outcome of the mediation.) Mediation is flexible, limited only by the willingness and ingenuity of the mediator and the parties. Generally, mediators focus on common interests. The disadvantage of mediation is that mediators are

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trained to “drive a deal” and, as a result, sometimes are less interested in facts or contract language than they are in completing a deal. The mediator’s job is to push for resolution regardless of the issues. This may become a real disadvantage when the parties enter into mediation at the urging of a court but are on “opposite sides of zero.” That is, if the parties do not agree on claim entitlement but the mediator is still pushing for settlement, mediation can be a frustrating and fruitless exercise. The AAA maintains a panel of qualified mediators, as do several private mediation services such as the Judicial Arbitration and Mediation Services (JAMS) or JAMS-Endispute, for example. One key to a successful mediation is to select a mediator with construction and litigation experience, the ability to discuss the strengths and weaknesses in each party’s positions correctly and persuasively, and the ability to maintain the parties’ confidence in their objectivity and advice. Mediation is occasionally mandated by contract, including A1A 201A (1997 Edition), but parties frequently enter into it voluntarily after a dispute has been identified and routine negotiations have failed. It is most likely to be successful when each party recognizes some responsibility for the problem, when each is familiar with and wishes to avoid the high cost and time consuming nature of litigation, and when a mutual desire exists to maintain an ongoing business relationship. By addressing the dispute as a joint business problem requiring compromise, the parties are frequently able to reach a mutually acceptable settlement and do so in a manner preserving future commercial dealings.

13.3.8. Med-Arb, Med-Then-Arb, and Arb-Med Another ADR method is a hybrid proceeding, a combined form known as Med-Arb (mediation-arbitration). This form of ADR was borrowed from labor relations, where it has been used for some years. The process is initiated with mediation of the issues. To the extent that issues can be resolved by mediation, they are settled. Once the parties agree that the remaining issues cannot be resolved by mediation, those issues are submitted to the arbitration process. By the terms of the original Med-Arb agreement, the parties agree that mediator becomes the arbitrator of the unresolved issues. Two variations of Med-Arb are • Med-Then-Arb—This hybrid technique is identical to that previously discussed, except that two different neutrals are employed. If the

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mediation fails, then the second neutral is brought in as the arbitrator. • Arb-Med—This is an ADR form in which a neutral arbitrates the dispute, makes an award, and then mediates the dispute while the award remains in a sealed envelope. If mediation fails, the arbitrator’s decision is unsealed, presented to the parties, and becomes binding. (A separate form of Arb-Med is discussed in later section.) The advantage of this system is that the parties are committed to a continuum of dispute resolution that will result in full resolution of all issues, in one forum or another. Further, the mediator becomes fully knowledgeable of the issues in dispute before becoming the arbitrator. As a result, this individual may be a more effective arbitrator. The most frequently cited disadvantage of the Med-Arb system concerns the role, power, and neutrality of the mediator/arbitrator. To be an effective mediator, the mediator needs the complete confidence of the parties during mediation and must be able to obtain confidential disclosures from each side. Knowing that the mediator may become the arbitrator, however, the parties may withhold some information, which may inhibit the chances of a successful mediation. However, if the mediator gains a substantial amount of confidential knowledge from the parties, this may make it difficult to be a neutral arbitrator.

13.3.9. Shadow Mediation/Arb-Med This ADR form is a hybrid of the arbitration process. In the Arb-Med process, a mediator is retained to sit through the arbitration hearings as an observer. At any time during the arbitration, if either of the parties wants to mediate a specific issue and the other party agrees, the arbitration proceeding is temporarily suspended and the shadow mediator, who is familiar with the case (having attended all arbitration proceedings), assists with mediation of the issue. The shadow mediator is also free to suggest possible avenues of settlement of issues to the parties during the arbitration proceedings. If the mediation is successful, the issue is resolved and removed from the arbitration proceeding. If it is unsuccessful, the issue is returned to the arbitration forum for a determination. Thus, two processes run concurrently with separate neutrals.

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If total agreement can be reached through mediation, the arbitration panel may be dismissed. The apparent advantage of this system is that it allows parties to remove selected issues from the arbitration process as the situation becomes clarified during arbitration and allows them to develop their own settlement, at least of some issues. As the size and scope of the disputed issues decrease, the likelihood of resolving the entire dispute increases. The principal disadvantage of this form of ADR is cost due to the use of two neutrals at all times.

13.3.10. Minitrial A minitrial is a voluntary, confidential, and nonbinding procedure. “The ‘Minitrial’ is not really a trial at all. Rather, it is a structured settlement process in which each side presents a highly abbreviated summary of its case to senior officials of each party who are authorized to settle the case.”32 Minitrial agreements frequently limit these presentations to a half day or a single day for each side. The minitrial concept requires that top management representatives (with authority to settle) participate in the proceeding. A jointly selected neutral typically presides over the minitrial. After the presentations are completed, this person advises the parties concerning the apparent strengths and weaknesses of each case. The neutral then assists the top management representatives to negotiate a settlement at this point, somewhat like a mediator. The concept is to require top-level management to sit through and listen carefully to both their best case and that of the other side and to reach a management decision that is based upon a realistic appraisal of both positions. The procedure puts the decision makers in the position of judges concerning the dispute rather than combatants. As with all forms of ADR, the parties are free to fashion their own rules and variations on the basic format. As with conventional mediation, the parties remain in control of the situation and have not surrendered decision making to a third party. The advantages of this system are the somewhat low cost (compared with litigation or arbitration) and the fact that each party gets to present its entire case as if in court or in arbitration. Additionally, the neutral advises and assists top management of both parties in finding ways to resolve the dispute rather than rendering a decision. Nonbinding results, privacy, party participation, and control over the process are also considered advantages of this ADR form.

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The biggest disadvantage of the minitrial system arises if the top management personnel were personally involved in the issues in dispute. This may render them unsuitable as panel members. Other disadvantages arise if the issues in dispute involve legal matters or matters of credibility because management personnel may not be trained to handle such issues. Finally, this system may not be cost-effective if the matter in dispute is not very costly. A variation of the minitrial is to empanel a mock jury similar to the minitrial process to assist the neutral and top management participants in understanding how a potential jury will react to the arguments presented and positions asserted.

13.3.11. Summary Jury Trial A summary jury trial is similar to the minitrial in many respects. The concept is that the attorneys for both parties get one or two hours to summarize their case before a “rented” jury of six or more people. Introduction of evidence is obviously limited due to the time limitation, and witnesses and experts are not allowed to participate in the proceeding. As a result, legal counsel for each side are essentially limited to their opening arguments. The neutral advisor may be either a sitting judge from a local court or a retired judge familiar with construction issues retained to preside over the summary jury trial. After the case summaries have been presented, the judge briefly explains the law concerning the issues in dispute and the jury retires to the jury room. The jury tries to reach a consensus opinion on the case. Failing that, individual juror views are presented anonymously. Generally, summary jury trial verdicts are advisory and nonbinding (but may be binding, made so by agreement of the parties). The concept for the parties to learn how a potential jury may react to the case before going to trial. The advantages of the system are that the cost is somewhat low compared with actual litigation and the time needed to present the case is minimal. Another significant advantage is that when the parties have to summarize their cases into precise one- or two-hour presentations, both sides are forced to focus on real issues and forego legal theatrics. The most commonly cited disadvantage is that the jury has to form an opinion based solely on a very short presentation from each side, a time frame that is short in the extreme, given the complexity of typical construction cases.

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13.3.12. Private Judge In some construction disputes, issues of law must be decided to reach resolution of the dispute. Generally, judges ought to decide issues of law because they are skilled and experienced in deciding legal issues. But litigation need not result. One form of ADR that allows input from judges but avoids the need for litigation is the private judge. The concept is to retain the services of a retired judge who is experienced with construction litigation. The private judge typically conducts the process in a formal manner resembling the litigation process but without the need to await an available courtroom and time on the court’s docket. The private judge generally renders decisions that may be either advisory or determinative of the issue, depending on the terms of the agreement between the parties. The advantages of this form of ADR are that retired judges practicing this type of ADR are most often skilled in managing complex construction cases and making decisions. This form of ADR typically costs less than many other forms and certainly a great deal less than litigation; the costs are generally split between the two parties to the dispute. Finally, the speed with which a hearing can be established and held is considerably faster than litigation. The primary disadvantage is that the underlying process remains the same regardless of the fact that the trier of fact is a retired judge. That is, if a private judge is used in a trial, in arbitration, or in mediation, due to his or her background and experience, any process overseen by a private judge will likely to be run like a formal trial.

13.3.13. Arbitration Arbitration in construction is not new, having arisen in the 1880s under the earliest forms of the AIA contract document.33 Arbitration is a consensual process based upon agreement between the parties. Arbitration panels are generally three-person panels selected by agreement of the parties either on their own or through the auspices of an organization such as the AAA. Arbitration always focuses on a single project and generally concerns only those disputed issues not resolved between the parties at the site level. Originally, arbitration was considered to be faster and less expensive than litigation. It was also generally considered to be an informal process, dispensing with the rules of evidence, prehearing motions, and

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most of the discovery process, all of which litigation requires. Thus, it was potentially flexible to fit the circumstances of the project. Once the determination of the panel is issued upon completion of the hearing, the arbitration award is typically enforceable in court. Because of the high cost of formal dispute resolution through litigation in state and federal courts, arbitration has been a popular form of ADR in nonfederal construction contracts for several decades. The AAA has promulgated a special set of arbitration procedural rules and maintains a nationwide panel of potential arbitrators. In response to criticism that arbitration of construction disputes has not always proven to be as quick and economical as originally intended, the AAA revamped its rules in 1995 to allow for expedited hearings on small disputes, special rules, and special panels for complex claims, etc.,34 and again in 2009.35 Three “tracks” of procedures based on the size of the claim are now available: the regular track (dealing with disputes in the range of $75,000 to $1,000,000); the fast track (pertaining to disputes less than $75,000); and the large, complex track (applicable to claims of at least $1,000,000). The fast-track system is intended to resolve smaller claims within 60 days and includes accelerated procedures for appointing arbitrators and holding preliminary conferences. New claims and counterclaims are not permitted, discovery is virtually eliminated, and claims of less than $10,000 are resolved without a hearing by the arbitrators’ review of documents. Hearings of one day are permitted for claims exceeding $10,000 and awards must be issued within 14 days after the completion of the hearing. Fast-track arbitrators are compensated on a per-case rate, and nonrefundable filing fees range from $775 to $975 for the initial filing fee and $200 to $300 for the final fee.36 Under the current regular-track system for midsize claims (defined as claims between $75,000 and $1,000,000), arbitrators are given expanded authority to manage the arbitration process to expedite resolution of the dispute. Arbitrators have the authority to direct the discovery process, permit new claims and counterclaims, hold preliminary conferences, consider preliminary motions and rulings, and request or reject certain offers of proof. In addition to monetary awards, arbitrators have the authority to grant equitable relief, such as specific performance, reformation, or recission, and they have limited authority to make modifications where an award contains technical or clerical errors. Initial filing fees for regular track cases range from $1,850 to $6,200 with a final fee ranging from $750 to $2,500.

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The large, complex track system is mandatory for claims in excess of $1 million and allows the parties the option to choose either one or three arbitrators. Where the parties agree to conduct a preliminary hearing, the rules set forth a detailed list of issues to consider, including statements of claims and issues, stipulations as to uncontested facts, the extent of discovery and document exchange, witness identification, hearing schedules, stenographic recording of the proceedings, and the use of other dispute resolution techniques. The complex track rules permit the arbitrators to limit the discovery process and generally control the proceedings to expedite a speedy resolution of the dispute, and in certain circumstances, to assign attorney’s fees as part of the award. The nonrefundable initial filing fee for complex track cases up to $10 million range from $8,200 to $12,800 with a final fee ranging from $3,250 to $4,000. For claims exceeding $10 million, the initial filing fee is $12,800 plus 0.01% of the amount over $10 million with the fee capped at $65,000 and the final fee at $6,000. The AAA is in the process of revising rules under all three tracks relating to arbitrator qualifications. Planned changes include requirements that potential arbitrators have a minimum of 10 years’ experience, be approved by regional construction advisory committees, and undergo mandatory training for initial qualification and retraining every three years. The most commonly cited advantage of arbitration over formal litigation is the use of arbitrators with knowledge of the construction industry. Additionally, because an arbitration proceeding is devoted to a single case, it has been commonly thought of as being quicker than litigation because the hearings do not have to compete for courtroom space and the court’s attention to other ongoing matters. Both the hearings and the decision are private matters, thus little publicity highlights the proceedings or the outcome. Arbitration panels are also allowed to grant any remedy or relief that is “equitable.” And the decision of the arbitration panel is most often final and conclusive of the matter. The key distinction between arbitration and mediation is that the arbitrators make a decision and issue an award concerning the dispute that has the same force and effect as a judgment rendered by a court. Arbitration has potential disadvantages. Arbitration panels may or may not explain the basis of their decisions unless the arbitration rules require them to. Thus, the parties may not understand why a decision is

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reached. The ability of the losing party to appeal a decision is severely restricted. Because the arbitration decision is almost always final and enforceable by law, the expense of preparing for arbitration is almost the same as preparing for litigation. As some have commented, “Arbitration is the only real crapshoot in construction disputes—everything else can be appealed!” Over the past two decades, arbitration has become much more formal and legalistic, frequently allowing as much pretrial discovery as any court case. The most cost-intensive aspects of litigation—extensive document discovery and production, multiple depositions, and unlimited motions practice—are now routine aspects of many, if not most, arbitration proceedings. Some practitioners complain that arbitration panels frequently do a poor job of limiting discovery and controlling the associated costs of the process. Many involved in the arbitration process contend that arbitrators tend to issue “compromise” awards (“split the baby” is a common phrase with respect to arbitration). As a result, some parties use baseball arbitration as an ADR form in which the arbitrator is required to issue a “winner take all” award, selecting the entire claim position of one party or the other (discussed further later). The construction industry generally agrees that arbitration is no longer faster or less expensive than litigation. In one major study of issues related to arbitration, 65% of in-house legal counsel respondents concluded that arbitration is more expensive than litigation, and another 23% opined that arbitration costs about the same at litigation. Only 13% of the survey respondents thought arbitration was less expensive than litigation.37 Another study concerning arbitration concluded that the “average arbitration” takes 17–20 months. However, this time frame is believed to include only the period from the start of the hearings to the issuance of the award and does not estimate the duration of the discovery and other prehearing time.38 Finally, a third study of the effectiveness of arbitration concluded that 12% of the respondents blamed delays in the arbitration process on arbitration panels being “overly flexible” or a “failure to control the process,” another 11% claimed that the “arbitrators caused delays,” and another 8% blamed the delay on “tardiness in rendering the award.”39 One arbitration alternative intended to save time and cost is the use of a single arbitrator rather than a three-person panel. The arbitrator must, therefore, act solely as a neutral. The cited advantages are that the

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cost of arbitration is substantially decreased and scheduling hearings is easier because the parties have to coordinate their schedules only with a single arbitrator. The previously discussed disadvantages remain fundamentally the same. However, an added disadvantage exists. If one arbitrator on a three-person panel becomes confused or sidetracked on a particular issue, the other two arbitrators can likely straighten the situation out. With a single arbitrator, no check-and-balance system is built in, thus dramatically increasing the risk of a bad decision due to confusion or inexperience with a particular issue. The AAA continues to address the most frequent criticisms of the system. On October 1, 2013, the AAA made several changes to its rules. Four of the major changes are as follows: • Mandatory mediation has been added to the arbitration rules. The new rule requires that all cases with claims in excess of $75,000 conduct a mediation at some point during the arbitration process. However, this rule does allow one or both parties to unilaterally opt out of the mediation. The AAA believes that incorporation of mediation into the arbitration process may help resolve disputes earlier and at less cost. • Under these new rules, arbitrators have been granted more authority to manage the process. The additional authority includes (1) holding a preliminary hearing soon after appointment of the tribunal and providing a checklist of discussion points at this initial hearing, (2) providing arbitrators the ability to control the scope of discovery, (3) allowing the tribunal to allocate the cost of document production between the parties, and (4) providing the tribunal with the authority to order sanctions for abusive or objectionable behavior. • The new rules specifically grant the tribunal the authority to issue rulings on dispositive motions if the moving party can show that the motion is likely to succeed and the motion, if granted, will dispose of or narrow the issues in the case. The AAA believes this will help eliminate claims with no merit and reveal factual information concerning the remaining claims. • The new rules also provide for “emergency relief.” A party may seek emergency relief prior to the appointment of the tribunal by notifying the AAA and other party of the type of relief sought

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and reasons why the relief is required on an emergency basis. The AAA will then appoint a single emergency arbitrator within one business day. The emergency arbitrator must then establish a schedule to consider the relief sought within two working days.

13.3.14. Advisory Arbitration/Fact Finding The previous general discussion of arbitration also applies to this form of ADR with the exception that the determination of the panel is not final. It is advisory only. The AAA refers to this process as “fact finding,” which involves utilization of a neutral (an impartial third party) who reviews the disputed issue and issues findings or conclusions with or without a recommended settlement.40 The advantages set forth previously also remain the same except, again, the decision is not final. However, the disadvantages do change because the decision is advisory. The apparent disadvantage is that a party can go through the entire arbitration process, receive an advisory opinion, and have the losing party refuse to accept the opinion.

13.3.15. Baseball Arbitration This unique form of arbitration is borrowed directly from professional sports. In this form of ADR, a single neutral arbitrator is retained. Both parties present their strongest case, along with the proposed monetary outcome that they believe the facts and the law support. The arbitrator must then choose one of the two outcomes proposed by the parties. The arbitrator cannot carve out an equitable determination but is required to select one position or the other. The intended advantage is that the parties will be more realistic in their demands because they understand that the arbitrator is required to select one position or the other and the parties will be bound by that selection. The disadvantage lies in the fact that the arbitrator can select only one position or the other. Thus, the arbitrator is unable to suggest a compromise position. Compromise in this form of ADR, to the extent it exists at all, lies with the two parties keeping their own positions as reasonable as possible.

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13.3.16. Alternative Dispute Resolution before the Boards of Contract Appeals and the U.S. Court of Federal Claims If the contractor is performing work under a direct federal contract subject to the Contract Disputes Act, then its choices are limited once a contracting officer denies a claim. The contractor may appeal such a denial either to the Armed Services Board of Contract Appeals (ASBCA) or the Civilian Board of Contract Appeals (CBCA), depending upon which government agency issued the contract, or to the U.S. Court of Federal Claims (COFC). Given the current state of ADR, both the Boards of Contract Appeals and the COFC now support and participate in ADR activities. ADR in both forums is strictly voluntary and is employed only if both the contractor and the government agree to use ADR. The Boards of Contract Appeals actively participate in ADR, going so far as to have board judges directly engage in the ADR procedure. The ASBCA supports the use of settlement judges, minitrials, and summary trials with binding decisions, whereas the CBCA rules allow for facilitative mediation, evaluative mediation, minitrials, nonbinding advisory opinions, and summary binding decisions. The COFC is not as directly engaged in ADR as the boards. However, when the parties advise the judge of their decision to use ADR, the COFC judge may arrange for a settlement judge or refer the case to a third-party neutral. The rules of the Court of Federal Claims clearly support the use of mediation, minitrials, early neutral evaluation, and nonbinding arbitration. Finally, both the COFC and the boards have procedures in place to shield the information gathered in the ADR process from the trial judge should ADR fail and the case return to litigation.

13.4. Alternatives during Litigation Despite the best efforts of one or both parties, some issues may not reach resolution through ADR and must be resolved through litigation. However, contrary to popular belief, ADR does not necessarily stop when litigation commences. Several forms of ADR are available for use during litigation as outlined in the following sections.

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13.4.1. Voluntary Settlement Conference A voluntary settlement conference is probably the quickest and least expensive means of resolving a case when both sides agree to compromise but want to do so in the context of a legal forum rather than direct negotiations. In this form of ADR, both sides meet to attempt to reach a settlement with a sitting judge or magistrate acting as a neutral negotiation facilitator. The negotiation and the settlement take place under the guidance of a judge. The judge can offer suggestions for settlement and opinions on various legal issues that may arise during such discussions. The advantages of this form of ADR include the ability to schedule the voluntary settlement conference with a judge of the parties’ choice and its quickness. Also cited as an advantage is that discovery need not be complete to hold the conference. Although this form of ADR has somewhat few identifiable disadvantages, some practitioners have expressed concern about the ability to have an open and candid settlement dialogue in the presence of a magistrate or judge who may, whether properly or improperly, communicate with the trial judge about the statements and offers made during the settlement conference.

13.4.2. Special Master/Settlement Judge The special master form of ADR (sometimes referred to as a settlement judge) has been called “ADR’s last clear chance before trial.”41 The concept of a special master is for the court to appoint someone with authority and availability to control the discovery process (such as deciding objections to deposition questions, document disputes, and claims of privilege), to rule on all pretrial matters in lieu of a judge, and to facilitate settlement discussions. Either or both parties may request special masters, or a court may unilaterally impose them. Payment is typically split between the disputants. By putting the litigation into a controlled framework, the special master often can help the parties reach a settlement prior to the trial. The advantages of the special master system are that it can save a great deal of time and cost during the pretrial period with respect to needless discovery battles and it can help facilitate settlement discussions. The perceived disadvantages of this system are that a court may grant too much authority to the special master (for example,

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summary judgment motions). Some practitioners also fear the possibility of private discussions between the special master and the trial judge concerning the details of settlement negotiations or positions asserted by the parties.

13.4.3. Court-Appointed Experts If the parties agree that certain issues in dispute require expert testimony and can agree to share the cost of such experts, then court rules in most states allow the appointment of experts by the court. Typically, once agreement on which issues need expert testimony is reached, each side nominates two or three experts to the judge and the judge selects one per issue. The expert then works for the court and is charged with the task of providing neutral expert-witness reports and testimony. The advantage is, in the first instance, a substantially lower cost for both parties. The other apparent advantage is that time is saved during litigation and the parties avoid conflicting expert reports and testimony that judges and juries have to sort out. The only apparent disadvantage is that if the judge selects the wrong expert, then the expert’s reports and testimony may be given far greater weight than they deserve. Thus, the parties and the judge must be very cautious about whom they nominate and select.

13.4.4. Judge Pro Tem Several states authorize a judge pro tem (or temporary judge). The concept is for the parties to stipulate to the court that they will accept appointment of a temporary judge, who is normally named by the parties in the stipulation. The court then appoints the temporary judge, who must be an attorney and who becomes the trial judge for the case. The temporary judge has all the powers of a sitting judge and simply acts in lieu of a permanent judge with all other aspects of litigation remaining the same. The judge pro tem maintains jurisdiction over the case until a final determination is reached and can hear and determine all post-trial motions. The advantage is that a case goes to trial much faster with a judge pro tem because the only case on the judge’s docket is the case between the parties. The disadvantage, at least in some states, is that by stipulating a judge pro tem, the parties give up their rights to a jury trial.

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13.5. Trial by Reference (Referee) Trial by reference before a referee, who need not be a judge or attorney, has long been accepted in both common law and statute. A referee is a neutral appointed by the court at the request of the parties. The court order appointing the referee sets forth the referee’s authority. Unless otherwise specified in an agreement between the parties, the referee will conduct himself or herself in accordance with formal rules of procedure. Two commonly accepted forms of trial by reference are • General reference—Under this form of ADR, the referee submits findings of fact and conclusions of law to the court. The referee’s report is binding on the court, and the court issues judgment based upon the report. • Special reference—In this form of ADR, the referee’s authority is limited to particular issues as outlined in the order of reference. More significantly, the referee’s report contains findings and recommendations that are made to the court in an advisory fashion. The court is free to issue its own judgment.

In both cases, the cost of the referee is typically allocated between the parties. The advantages of such a system are speed of trial, ease of scheduling the hearings, and privacy of the proceedings. Others cite the ability of the parties to select a referee who has expertise in the types of issues in dispute, the flexibility of procedures, and the ability to appeal decisions or recommendations. The main disadvantage is that the parties have to pay their own costs of trial preparation and pay the costs of the referee. Further, the referee’s decision lacks finality because it can be appealed.

13.6. Administrative Dispute Resolution Act and the Federal ADR Experience Federal agencies have embraced mediation and other ADR techniques in recent years with very positive results. The Administrative Dispute Resolution Act of 1996 (ADRA)42 encourages voluntary use of ADR techniques in federal contract disputes. The Federal Acquisition

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Regulation (FAR) now contain implementing regulations encouraging agencies to use ADR to the “maximum extent practicable.”43 The ASBCA and CBCA have adopted rules permitting and facilitating ADR procedures prior to formal administrative proceedings. ADR is used increasingly frequently and successfully as a method of resolving disputes with the federal government. In an October 1996 survey conducted by Judge Martin J. Harty of the ASBCA,44 the boards collectively received ADR requests covering 169 appeals in fiscal year 1996. Binding ADR (summary trials) and nonbinding ADR (settlement judges and minitrials) were the methods typically used. The ASBCA’s experience with the 42 ADR requests it received was that 9 out of 10 ADR proceedings resulted in an agreement that resolved the dispute.45 This report identified cases particularly suitable for ADR: • Small dollar cases, particularly where litigation costs would seriously erode any award; • Noncomplex cases with somewhat clear-cut factual or legal issues; • Cases where only quantum is in dispute; and • Large, factually complex claims where both parties recognize some liability.46

13.7. Formal Administrative and Judicial Dispute Resolution The least desirable method of dispute resolution is litigation or administrative proceedings on federal (and some state) contracts. The timeconsuming nature, the attendant expenses, and the adversarial quality of these approaches have fostered the tremendous support for the ADR techniques previously discussed.

13.7.1. Federal Contracts Chapter 2 discusses the initial steps of pursuing a claim into formal dispute resolution on federal construction contracts. The strict certification rules, unforgiving time limits, and procedural technicalities involved in appealing a contracting officer’s final decision on a claim require extremely careful attention from the contractor. A detailed

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examination of such legal matters is beyond the scope of this chapter, and contractors proceeding with claims beyond the contracting officer’s level are well advised to seek legal advice from qualified attorneys. A few of the major pitfalls and a general outline of the process are as follows: • Contractors who choose to appeal an adverse decision to a Board of Contract Appeals must do so within 90 days of receipt of the contracting officer’s final determination or lose their right of appeal to a board. Contractors who opt to appeal to the Court of Federal Claims must do so within one year of receipt of the final decision. Neither the boards nor the Court of Federal Claims has the authority to waive these filing deadlines. • As noted in Chapter 2, a failure to certify a claim in excess of $100,000 will result in dismissal of an appeal. Mere errors in the required certification language can be corrected without penalty prior to the issuance of a final judgment by a board or court. Further, the contracting officer is required to advise the contractor of any alleged defects in certification within 60 days of receipt of the claim.

These time limits are strictly enforced, and contractors must not wait until the eleventh hour to take the necessary steps. Appeals to the boards begin by filing a short notice of appeal with the appropriate board, with a copy furnished to the contracting officer. Proceedings at the U.S. Court of Federal Claims begin more formally with the filing of a detailed complaint. Several federal statutes, including the Contract Disputes Act and the False Claims Act, impose various penalties on contractors submitting groundless or fraudulent claims.47 Penalties include fines, imprisonment, claim forfeiture, contract forfeiture, and reimbursement of the government’s costs of investigation.48 Accordingly, contractors are strongly advised to avoid making any false representations concerning claims and to carefully examine all claims for accuracy and adequate support.

13.7.2. Private Contracts and State and Local Public Contracts Absent contract provisions or a subsequent agreement to proceed with some form of ADR, resolution of disputes on private contracts and

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public contracts at the state or local level frequently require litigation before state or federal courts. As with federal contract formal dispute resolution, these proceedings involve compliance with various statutes and rules requiring advice of counsel. States also impose statutes of limitations for lawsuits involving written contracts. Under these legislated limitation requirements, lawsuits must be filed within a specified timeframe—which varies from state to state—after the “cause of action accrues.” This is generally, but not always, marked from the date the contractor knew or should have known of the basis for the claim.

13.7.3. Mechanic’s Liens On private contracts, contractors typically have an alternative or parallel remedy in the form of mechanic’s liens filed and perfected in strict accordance with the state’s statutory scheme for such liens. In some states, filing a notice of lien is necessary before commencing the work. Further, under most state mechanic’s lien statutes, the time periods for filing and perfecting such liens are extremely short and strictly enforced. Again, the assistance of an attorney and at least a general familiarity with the lien laws in the state where the construction contract is being performed are critical.

13.8. Conclusion Disputes that cannot be resolved often result in a tremendous amount of nonproductive downtime for all parties to the contract. Pursuing or defending claims and disputes is costly, time consuming, and detrimental to project relationships, and generally adds no value to the constructed project. ADR procedures, however, provide viable alternatives to costly litigation and help projects get back on track quickly and productively. As noted at the outset of this chapter, the construction industry is at the forefront of finding ways to resolve disputes without resorting to litigation. While this chapter identifies nearly 30 forms of ADR (and several variations), the authors are confident other forms of ADR exist. Further, the forms of ADR are truly only limited by the parties’ skill, imagination, and desire to settle disputes.

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Endnotes 1. Portions of this chapter are reprinted with permission from Construction Contract Claims, Changes & Dispute Resolution, 2nd Ed., Paul Levin, ASCE Press, Reston, VA, 1998. 2. See An Overview of Alternative Dispute Resolution Use in the Construction Industry, Matthew P. Tucker, The University of Texas at Austin, August 2005. 3. See Avoiding and Resolving Contract Disputes During Construction: Successful Practices and Guidelines, American Society of Civil Engineers, New York, 1991. 4. See Recommended Procedures for Settlement of Underground Construction Disputes, U.S. National Committee on Tunneling Technology, Washington, D.C., 1977. 5. Randall J. Essex, Geotechnical Baseline Reports for Construction: Suggested Guidelines, Technical Committee on Geotechnical Reports of the Underground Technology Research Council, American Society of Civil Engineers, New York, 2007. See also, Guidelines for Preparing Geotechnical Design Reports, California Department of Transportation, Division of Engineering Services, Geotechnical Services, Sacramento, CA, December 2006. 6. Partnering—A Concept for Success, Associated General Contractors of America, Washington, D.C., September 1991. 7. Charles R. Glagola and William M. Sheedy, “Partnering on Defense Contracts,” Journal of Construction Engineering and Management, Vol. 128, No. 2, American Society of Civil Engineers, April 1, 2002. 8. Erik Larson, “Project Partnering: Results of Study of 280 Construction Projects,” Journal of Management in Engineering, American Society of Civil Engineers, Vol. 11, No. 2, March 1, 1995. 9. Thomas R. Warne, Partnering for Success, American Society of Civil Engineers, New York, 1994. 10. The term “claim” is defined for the purposes of this chapter as a written statement from one of the contracting parties requesting additional time and/ or money for acts or omissions under the terms of the contract for which proper notice has been provided and the claimant can demonstrate entitlement under the contract and is able to document both causation and resulting damages. 11. See Article 15.2.1 of A201-2007 and Article 3.3.1.11 of AIA B201-2007. See also, Jeffrey L. Alitz and Ben N. Dunlap, The New AIA and ConsensusDOCS: Beware of the Differences—The Professional Services Agreements, Schinnerer’s 47th Annual Meeting of Invited Attorneys, 2008. 12. See The Construction Industry’s Guide to Dispute Avoidance and Resolution, American Arbitration Association, New York, 2004. 13. Published by The ConsensusDocs Coalition, Arlington, VA, 2011 edition. 14. Id. The American Arbitration Association refers to this ADR form as an onsite neutral. 15. Kurt Dettman, Suzanne Harness, and John Carpenter, “Project Neutrals to the Rescue! A New Tool for Avoiding and Resolving Disputes on Construction Projects,” Under Construction, Vol. 13, No. 3, August 2010, American Bar Association Forum on the Construction Industry.

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16. Lowell J. Notebloom, Owner Controlled Dispute Resolution, 15th Annual Construction Superconference, San Francisco, CA, December 1996. 17. As discussed in this chapter, this statement can be said to apply at least to heavy and highway construction, but is not universally accepted. A 1996 AGC survey found “perceived effectiveness” of various ADR procedures to be led by partnering, followed by mediation, early neutral evaluation (standing or project neutral), binding arbitration, nonbinding arbitration, and DRBs, in that order. Constructor, AGC, Washington, DC, January 1997. 18. Robert M. Matyas, A.A. Matthews, Robert J. Smith, and P.E. Sperry, Construction Dispute Review Board Manual, McGraw-Hill, New York, 1996. 19. Better Contracting for Underground Construction, U.S. National Committee on Tunneling Technology, Standing Subcommittee No. 4—Contracting Practices, U.S. Department of Transportation, Urban Mass Transit Administration, Washington, D.C., 1974. 20. Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute Adjudication Boards, The Dispute Resolution Board Foundation, Seattle, WA, 2007. 21. Randy Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time” Resolution and Prevention of Disputes, International Institute for Conflict Prevention & Resolution, CPR Construction Advisory Committee, Dispute Resolution Board Subcommittee, New York, 2010. 22. Published by the Dispute Review Board Foundation, Seattle, WA, revised January 2007. 23. Randy Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time” Resolution and Prevention of Disputes, ibid. 24. Robert M. Matyas et al., Construction Dispute Review Board Manual, ibid. 25. Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time” Resolution and Prevention of Disputes, ibid. 26. Robert M. Matyas et al, Construction Dispute Review Board Manual, ibid. 27. Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute Adjudication Boards, The Dispute Resolution Board Foundation, ibid. 28. Marthinus Maritz, “Adjudication of Disputes in the Construction Industry,” Essays Innovate, No. 3, 2009. 29. Federation Internationale De Ingenieurs-Conseils (FIDIC). 30. Adjudication: A Quick Guide, UK Practical Law Construction, www.practicallaw. com/8-31-7429. 31. Cleaver Fulton Rankin, The Benefits of Adjudication in the Construction Industry, April 2010. 32. Eldon H. Crowell and Charles Pou, Jr., “Appealing Government Contract Decisions: Reducing the Cost and Delay of Procurement Litigation with Alternative Dispute Resolution,” Maryland Law Review, Vol. 49, Issue 1, October 15, 2012. 33. See American Institute of Architects, Uniform Contract, Articles II and V, 1888 and Form 19642-PL, Uniform Contract, Article XIII, 1905. 34. American Arbitration Association, Construction ADR Task Force Report, New York, October 26, 1995.

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35. Construction Arbitration Rules and Mediation Procedures—Rules Amended and Effective October 1, 2009, American Arbitration Association, New York. 36. All filing fees cited in this chapter are from the Fee Schedule Amended and Effective June 1, 2010, Construction Arbitration Rules & Mediation Procedures, American Arbitration Association, New York, October 1, 2009. 37. International Arbitration: Corporate Attitudes and Practices, Queen Mary University of London School of International Arbitration and PriceWaterhouse Coopers, London, 2006. 38. Frederick Gillion, Trends in ICC Arbitration: Construction and Engineering Disputes, http://construction.practicallaw.com, July 30, 2012. 39. 2010 International Arbitration Survey: Choices in International Arbitration, Queen Mary University of London School of International Arbitration and White & Case, London, 2010. 40. Id. The Construction Industry’s Guide to Dispute Avoidance and Resolution. 41. Alan E. Harris, C. M. Sink, and R. W. Wulff, Editors, ADR: A Practical Guide to Resolve Construction Disputes—Alternative Dispute Resolution in the Construction Field, American Arbitration Association, Kendall/Hunt Publishing Company, Dubuque, IA, 1994. 42. P.L. 104-320, 110 Stats. 3870 (October 19, 1996). 43. FAR §33.204. 44. Federal Contract Reports, Vol. 66, November 15, 1996, 525–530. 45. Report of Transactions and Proceedings of the Armed Services Board of Contract Appeals for the Fiscal Year Ending September 30, 1996. 46. Id. See note 16, p. 527. 47. E.g., 18 U.S.C. §287, 18 U.S.C. §1001, and 41 U.S.C. §604. 48. See, for example, Daewoo Engineering and Construction Co., Ltd. v. United States, 73 Fed. Cl. 547 (2006) (where the contractor filed an appeal to the U.S. Court of Federal Claims in the amount of $63.9 million on an $88.6 million contract. After a 13-week trial Daewoo ended up owing the government $50,629,856 plus False Claims Act costs of $10,000 for each violation, which was still subject to accounting at the time the court issued the initial decision).

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Chapter 14

Termination of Construction Contracts Dorothy E. Terrella and Nicholas J. Suraceb

14.1. Introduction Construction contracts have evolved to recognize an owner’s right to terminate a contractor before project completion without rendering the action a breach of contract. Standard contract clauses define an owner’s and a contractor’s rights and obligations in the event of a termination. This chapter addresses two types of termination by an owner—”termination for default” and “termination for convenience.” Included in the summary are background issues relating to each termination scenario; grounds for termination by the owner; practical considerations upon receipt of a termination notice; contractor liabilities and risks; and contractor remedies, recovery, and appeal rights.

14.2. Termination for Default 14.2.1. Background Termination of a contractor for default is a drastic action, with significant repercussions for both the contractor and the owner. Insofar as the a

Of Counsel, Smith Pachter McWhorter PLC. Associate, Smith Pachter McWhorter PLC.

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contractor is concerned, the negative ramifications are somewhat obvious. Default terminations mar a contractor’s record and can have a devastating effect on the contractor’s ability to compete for future work. Default termination under a federal contract may also lead to the contractor’s suspension or debarment, which excludes a contractor from future government work for a specific period of time. Insofar as the owner is concerned, termination of a contractor for default may have an overall negative effect on the project, delaying completion,1 and if utilized improperly, exposing the owner to additional liability. If the contractor successfully challenges the owner’s default termination decision, the termination may be considered a breach of contract and the owner will accrue substantial additional costs. However, in some circumstances the owner will determine that the benefits of terminating the contractor for default outweigh the potential detriments and will utilize the contractual mechanism provided by the clause.

14.2.2. The Owner’s Right to Terminate for Default Under the termination for default clause mandated for use in construction contracts with the federal government2 and most standard clauses employed by private parties,3 the owner is justified in terminating a contractor for default under certain enumerated circumstances. First, the owner is justified in terminating the contractor if the contractor does not meet the contract completion date or if the owner believes the contractor will fail to meet the completion date.4 Similarly, when a contractor fails to make progress or otherwise endangers the success of the contract, the owner can terminate for default without waiting for the contract completion date. For example, where a contractor unreasonably delays the project start date, default termination may be justified.5 A third ground for default termination occurs when the contractor fails to perform any other material provision of the contract. Although the term “material provision”6 has not been clearly defined in this context, default termination has been recognized as proper where the contractor failed to maintain an adequate payment bond,7 diverted materials,8 or insisted that the owner issue a change order before the contractor would perform disputed work.9 Finally, the owner may terminate a contractor for default in the event of the contractor’s “anticipatory repudiation” of the contract; that is, when the contractor unequivocally expresses, by words or actions, that it

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is unable or unwilling to perform. Where the contractor remains willing and able to perform, its actions do not constitute an anticipatory repudiation.10 The Termination Decision Even where the owner is legally justified in terminating a contractor for default, the owner must apply business judgment and consider the project, equity, and good conscience in making a termination decision. Underscoring the significance and potential negative consequences of a default termination as previously described, the Federal Acquisition Regulation (FAR) requires the government to consider several factors when considering whether to terminate a contract for default, including • • • •

The terms of the contract and applicable laws and regulations; The specific failure of the contractor and the excuses for the failure; The availability of the supplies or services from other sources; The urgency of the need for the supplies or services and the period of time required to obtain them from other sources as compared with the time delivery could be obtained from the delinquent contractor; • The degree of essentiality of the contractor in the government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts; • The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and • Any other pertinent facts and circumstances.11 Actions to Take under a Notice of Default Termination Often, the first step the owner takes when terminating a contractor for default is to issue a “cure notice.” A cure notice is a written communication from the owner asking the contractor to “show cause” why the contract should not be terminated for default within a specified period of time. Contractors should take advantage of the opportunity to respond to a cure notice, address the owner’s concerns, and attempt to persuade the owner that it does not have a basis to terminate the contract for default. The owner will be justified in terminating the contractor for default if the contractor fails to respond to the cure notice.12

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Even if the owner’s basis to terminate the contractor for default is valid, the contractor may have defenses against the termination. Historically, the owner could waive its right to terminate the contractor for default if the contractor relied upon the owner’s “waiver.”13 However, in recent years, the Armed Services Board of Contract Appeals has held that the waiver doctrine is largely inapplicable to federal construction contracts, absent “unusual circumstances.”14 For example, such “unusual circumstances” were found to exist where the government allowed the contractor to continue work for more than two years after the contract completion date, the contract contained no liquidated damages provision, and the government indicated to the contractor that time was not of the essence.15 However, reviewing bodies rarely find such “unusual circumstances” to exist. The contractor can also defend against a default termination by asserting that the owner materially breached the contract, for example, by failing to pay the contractor or showing that the contractor was not responsible for the project delays in question.16 Sureties obligated under a performance bond will become involved in a default termination scenario. Under the standard performance bond issued by the American Institute of Architects (AIA), the owner is obligated to notify the surety when the owner is considering declaring the contractor in default and allow the surety an opportunity to perform and complete the contract.17 If the owner ultimately terminates the contractor for default, the surety can complete the work itself, or, if the owner consents, arrange for the original contractor to complete the contract or obtain bids from qualified contractors.18 Given the critical role of the surety in such circumstances, contractors are well advised to maintain healthy and cooperative surety relationships. Federal regulations provide the government with several alternatives to default termination of a contractor. Under FAR 49.402-4, the government may, in lieu of a termination for default • Permit the contractor, the surety, or the guarantor to continue performance of the contract under a revised delivery schedule; • Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the government are adequately preserved; and • If the services are no longer required, the government may execute a no-cost termination settlement agreement.19

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Contractor Recovery for Wrongful Default Termination In the event an owner terminates a contractor for default, the contractor may appeal the decision and seek conversion of the default termination to a termination for the convenience of the owner.20 If successful, the contractor will be entitled to a termination for convenience recovery as described in section 14.3. In nonfederal contracts, the reviewing court may consider the improper termination to be a breach of the contract, thus entitling the contractor to breach of contract damages. 21 Contractor Liability for Valid Default Termination If an owner’s default termination is upheld as valid, the contractor is liable for the excess costs incurred by the owner as a result of the contractor’s default in addition to the negative impact a termination for default will have on a contractor’s past performance record.22 The contractor may also be liable for contractually specified liquidated damages that accrue due to project delay.23 Additionally, if the owner establishes that it suffered an injury as a result of the contractor’s default, the contractor may be liable for the owner’s foreseeable damages, which may include administrative costs.

14.3. Termination for Convenience 14.3.1. Background The termination for convenience clause gives the owner a unilateral right to terminate a contract before it is completed without regard to the contractor’s performance. Once unique to federal contracts, variations on the federal model are now commonly found in both local and state government contracts and in private contracts. One significant benefit of the termination for convenience clause is that it immunizes the owner from liability for certain categories of damages, such as anticipatory profit on work not performed, that would otherwise be available to the contractor in the event of the owner’s breach.

14.3.2. Owner’s Right to Terminate for Convenience A contract can be terminated for convenience, in whole or in part, whenever the owner deems such a termination to be in its best interest.

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For example, if the owner no longer needs the services for which it has contracted, or if the owner wishes to restructure a contractual arrangement, the owner may terminate the contract pursuant to this clause without incurring liability for breach of the contract. However, the owner does not possess unfettered discretion in this regard and “may not terminate simply to get a better price for performing needed work.”24

14.3.3. Actions to Take under a Notice of Termination for Convenience A contractor may challenge an owner’s decision to terminate the contract for convenience on the basis of bad faith or abuse of discretion on the part of the owner.25 However, such circumstances are not typical and are difficult to prove. Regardless of the possibility of a bad-faith challenge, once the contractor receives notice that the contract has been terminated for convenience, the contractor is required to 1. Stop work; 2. Place no additional subcontracts or orders; 3. Terminate and settle all subcontracts and assign the owner all rights under the terminated subcontracts; 4. Transfer title and deliver to the owner all termination inventory; 5. Complete performance of work not terminated, if any; 6. Take any action that may be necessary for the protection and preservation of the work; and 7. Submit a termination settlement proposal to the owner within the time contractually specified (one year in federal contracts).26

14.3.4. Contractor Recovery After a termination for convenience of a federal contract, the primary objective under the FAR is a negotiated settlement of the contractor’s recovery.27 In general terms, the FAR contemplates “fair compensation” to the contractor through the application of business judgment, as distinguished from strict accounting principles.28 The contractor has the general right to recover its allowable costs29 incurred on work performed to that point, plus profit on the completed work. However, the FAR specifically prohibits contractor recovery of anticipated profits on the unperformed, terminated work.30 In addition, the contractor may not

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recover profit on work performed “if it appears that the contractor would have incurred a loss had the entire contract been completed.”31 FAR 52.249-2 also provides for contractor recovery of the reasonable settlement costs, including but not limited to accounting, legal, clerical, and other expenses associated with the preparation of a termination settlement proposal.32 When the owner only partially terminates a contract for its convenience, the contractor may also be entitled to recover any increased costs incurred in performing the unterminated portions of the work that result from the partial termination.33 Where the parties do not reach a negotiated settlement as contemplated under the FAR, the government is authorized to issue a unilateral decision on the amount of the contractor’s recovery.34

14.3.5. Constructive Termination for Convenience When the government prevents a contractor from performing for reasons that are later found to be invalid, the government may be found to have constructively terminated the contract for convenience. For example, in instances where the government mistakenly deems a contract to be illegal or erroneously cancels a contract, the contract will be considered to be retroactively terminated under the termination for convenience clause. The government’s “breach” is thereby “retroactively justified.”35

14.3.6. Termination for Convenience versus Deductive Change The owner’s deletion of work to be provided under a contract can be classified as either a partial termination for convenience or a deductive change under the contract’s “changes” clause. The distinction is significant to the contractor because no profit recovery occurs on terminated work in a termination for convenience.36 When deleted work is instead considered a deductive change, it is administered as an “equitable adjustment,” which may result in some recovery of anticipated profit on unperformed work, depending on the circumstances and whether the contractor is in a profit or loss scenario on the contract. While the relevant facts are typically considered on a case-by-case basis, two objective tests for determining whether deleted work is considered a termination for convenience or a deductive change are

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1. Whether the eliminated work is considered a minor or major portion of the original scope of work (e.g., based on relative dollar value and quantities) and 2. Whether the eliminated work is identifiable and lends itself to being segregated. In general terms, if the eliminated work is “minor,” then the modification is typically considered a deductive change, whereas “major” deletions are generally analyzed under the termination for convenience clause.37 Reductions in the quantity of work or elimination of identifiable parts of the work are generally considered under the termination for convenience clause, whereas deletions of nonsegregable portions of the work, such as changes in the specifications, will be considered deductive changes.

14.4. Termination by Contractor Federal contracts grant the government the exclusive right to terminate a contract, either for default or for convenience. In contrast, as described in the following sections, some private contracts allow the contractor the right to terminate the contract under specified circumstances, such as nonpayment by the owner.38

14.5. Private Clauses Documents issued by AIA are recognized standards in private construction contracts. AIA document A201, General Conditions, contains a clause authorizing the owner to terminate “for cause” (¶14.2), which is similar to the federal termination for default clause. The 2007 edition of A201 includes both a “suspension by the owner for convenience” clause (¶14.3) and a “termination by the owner for convenience” clause (¶14.4). A201 also provides for a contractor’s right to terminate (¶14.1). Contractors are cautioned strongly, however, to examine carefully the termination language contained in the specific contract in question. Significant variations and deviations from the AIA clauses may substantially affect the contractor’s rights and remedies.

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Because of the popularity of the AIA standard form contracts and their similarity to many private contracts based thereon, the AIA termination clauses are discussed in the following sections.

14.5.1. Termination for Cause Under ¶14.2 (A201), an owner can terminate a contract if the contractor substantially breaches the contract, if it fails to pay subcontractors, or if it “repeatedly” disregards applicable laws and regulations or “repeatedly” fails to supply sufficient workers or materials. In these circumstances, after giving the contractor seven days written notice, the owner may terminate the contract, take possession of the site and the contractor’s materials and equipment, and finish the work by any reasonable method the owner deems expedient (¶14.2.2).

14.5.2. Suspension for Convenience Paragraph 14.3 (A201) authorizes the owner to “suspend, delay or interrupt” the contract without cause or without stating any reason for doing so. The owner must give the contractor written notice of the suspension or delay, and the contractor is entitled to an adjustment for the resulting increased costs of performance. (Under ¶14.1, discussed in section 14.5.3, the contractor may terminate the contract if owner suspensions or delays total “more than 100 percent of the total number of days scheduled for completion, or 120 days in any 365-day period, whichever is less.”)

14.5.3. Termination by Contractor In general, few circumstances allow a contractor to willfully terminate a contract. Most termination clauses authorize only the owner to terminate and the contractor to recover payment for completed work. However, ¶ 14.1 (A201) includes a provision more favorable to contractors, allowing them to terminate a contract after either a 30-day work stoppage for one of five specified reasons (¶14.1.1) or a 60-day work stoppage “with respect to matters important to the progress of the, Work.” In either case, the contractor must give the owner seven days' written notice of termination after the work has been stopped for the specified number of days.

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• After 30-day work stoppage: A contractor may terminate a contract if the work is stopped for 30 days through no fault of the contractor or subcontractors for any of five reasons: (1) issuance of an order by a court or public authority; (2) an act of government requiring work to stop; (3) failure of the architect to issue a certificate for payment and notify the contractor of reasons for withholding certification; (4) owner failure to make timely payments; or (5) failure by the owner to furnish evidence of financial capability to pay, upon the contractor’s request for such proof (¶14.1.1). After the 30-day work stoppage, the contractor must then give seven days’ written notice of the termination to the owner and architect (¶14.1.3). • After 60-day work stoppage: If the owner fails to fulfill contract obligations “with respect to matters important to the progress of the Work,” the contractor can terminate after the work has been stopped for 60 days by then giving seven days’ written notice (¶14.1.4).

14.6. Conclusion While termination clauses are recognized as standard in the construction industry, the rights and obligations of the owner and contractor are creatures of contract and governed by the specific provisions contained in the agreement between the parties. Contractors are well advised to familiarize themselves with the specific termination provisions of their contracts and subcontracts, both during the bidding and performance of construction projects.

Endnotes 1. See Morganti National, Inc. v. United States, 49 Fed. Cl. 110 (2001) (upholding default based on failure to maintain the construction schedule). 2. FAR 52.249-10 (“Federal Acquisition Regulation”). 3. See AIA Document A201 § 14.2 (1997). 4. See Empire Energy Mgmt. Sys., Inc. v. Roche, 362 F.3d 1343, 1354 (Fed. Cir. 2004); Danzig v. AEC Corp., 224 F.3d 1333 (Fed. Cir. 2000) (upholding the default termination of a contractor that failed to provide the requisite assurances that it could complete the project in a timely manner).

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5. Necco, Inc., GSBCA No. 16354, 05-1 B.C.A. ¶ 32902, at 163,002-03. 6. See Appeal of Questar Printing, Inc., GPOBCA No. 19-94 (identifying “lack of progress in performance” and “not furnishing a required performance bond” as examples of “failure to satisfy ... [a] material provision of [an] agreement”). 7. Airport Indus. Park, Inc. v. United States, 59 Fed. Cl. 332, 334-35 (2004). 8. Titan Stone, Tile & Masonry, Inc. v. Hunt Const. Grp., Inc., 394 F. App’x 862, 864 (3d Cir. 2010). 9. R.C. Prof. Servs., Inc. v. Dep’t of Homeland Sec., CBCA No. 775, 09-2 B.C.A. ¶ 34308, at 169,468. 10. Bd. of Water & Sewer Comm’rs of City of Mobile v. Bill Harbert Const. Co., 27 So.3d 1223, 1258-61 (Ala. 2009). 11. FAR 49.402-3(f). 12. Global Constr., Inc. v. Dep’t of Veterans Affairs, CBCA No. 1198, 10-1 B.C.A. ¶ 34363, at 169,699. 13. See Banks Bldg. Co., LLC v. Malanga Family Real Estate Holding, LLC, 102 Conn. App. 231, 240-41 (2007) (holding defendant implicitly waived its right to terminate for default); Madden Phillips Const., Inc. v. GGAT Dev. Corp., 315 S.W.3d 800 (Tenn. Ct. App. 2009) (noting defendant waived its right to terminate plaintiff for default due to plaintiff’s one-and-a-half month suspension of performance because defendant thereafter allowed plaintiff to resume work for almost eight months before terminating the contract). 14. Amerescosolutions, Inc., ASBCA No. 56811, 10-2 B.C.A. ¶ 34606, at 170,551. 15. B.V. Constr., Inc., ASBCA Nos. 47766, 49337, 50553, 04-1 B.C.A. ¶ 32,604, at 161,325-63. 16. See Bast Hatfield, Inc. v. Joseph R. Wunderlich, Inc., 78 A.D.3d 1270, 1275 (N.Y. Sup. Ct. 2010); Madden Phillips Const., Inc. v. GGAT Dev. Corp., 315 S.W.3d 800, 818-19 (Tenn. Ct. Appt. 2009). 17. See AIA Document A312 (2010). 18. Id. 19. See, e.g., FAR 49.603-6, 7. 20. See Martin Const., Inc. v. U.S., 102 Fed.Cl. 562 (2011) (holding defective design and subsequent actions caused excusable delay, making the termination for default improper); D.C. v. Kora & Williams Corp., 743 A.2d 682, 698 (D.C. 1999) (affirming “decision converting the termination to one for the convenience of the District”); CJP Contractors, Inc. v. U.S., 45 Fed. Cl. 343 (1999) (converting improper termination for default to a termination for convenience based on unreasonable exercise of contracting officer’s discretion). 21. See Rhode Island v. SJV Electric Inc., PB No. 01-1932, at 15 (R.I. 2008) (http://www. courts.ri.gov/Courts/SuperiorCourt/DecisionsOrders/01-1932.pdf) (showing damages contractor may recover when court finds owner improperly terminated for default). 22. Stonehill-PRM WC I, L.P. v. Chasco Constructors, Ltd., 03-08-00494-CV, 2009 WL 349136 (Tex. App. Feb. 11, 2009) (citations omitted); Mergentime Corp. v. Washington Metro. Area Transp. Auth., No. Civ. 89-1055 TFH, 2006 WL 416177 (D.D.C., Feb. 22, 2006) (awarding excess completion damages and other backcharges in default termination context).

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23. Weitz Co. LLC v. MacKenzie House, LLC, 665 F.3d 970, 974 (8th Cir. 2012); In Re Standard Coating Serv., Inc., ASBCA No. 48611, 00-1 B.C.A. (CCH) ¶ 30725 (Jan. 10, 2000) (assessing certain liquidated damages for work completed late, but not for work the government “decided that it does not want”). 24. Sigal Constr. Corp., 10-1 BCA ¶ 34442, at 169,971. 25. Libertatia Associates, Inc. v. U.S., 46 Fed. Cl. 702 (2000) (holding “evidence supported conclusion that the government acted in bad faith in the administration of grounds maintenance contract on Army base, resulting in an improper termination for default”). 26. FAR 49.601-2(b). 27. FAR 49.201(b). 28. FAR 49.201(a). 29. FAR Part 31 governs the allowability of costs associated with a termination for convenience. 30. FAR 49.202. 31. FAR 49.203(a). 32. FAR 52.249-2(g)(3). 33. Hunter Manufacturing Co., ASBCA No. 48693, 97-1 BCA ¶ 28,824, at 143,830. 34. FAR 49.105(a)(4). 35. Maxima Corp. v. United States, 847 F.2d 1549, 1553 (Fed. Cir. 1988). 36. See Praecomm, Inc. v. United States, 78 Fed. Cl. 5, 12 (Fed. Cl. 2007) aff’d, 296 F. App’x 929 (Fed. Cir. 2008) (noting “[u]nder the termination-for-convenience clause, anticipatory profits and consequential damages are not recoverable); D.C. v. Org. for Envtl. Growth, Inc., 700 A.2d 185, 199 (D.C. 1997) (noting “[t]he major impact of the termination for convenience procedure is that it relieves the government from the obligation of paying anticipated profits for unperformed work when it terminates the contractor’s performance under the contract”). 37. See generally Holmes, AGBCA No. 87-411-1, 90-1 BCA ¶ 22628, at 113,498; Ideker, Inc., ENGBCA Nos. 4389, 4602, 87-3 BCA ¶20,145, at 101,974. 38. See AIA A401-2007 § 7.1 (2007).

Chapter 15

Bonds and Liens Rebecca Glosa

15.1. Overview The importance of surety bonds in construction is immeasurable. Surety bonds provide financial security and construction assurance by assuring project owners that contractors will perform the work and pay specified subcontractors, laborers, and material suppliers. This chapter explores various issues surrounding the types of bonds commonly issued in the construction industry. Further, this chapter discusses statutory requirements for bonds, the claims procedure, and the applicable statute of limitations for initiating a legal action against a bond. Equally important is understanding how liens on both private and public projects (wherein the “liens” are called stop notices) can affect the progress to completion. The appropriate remedy depends on several factors, such as the nature of the project (public or private) and whether the parties to the bond intended the claimant to be a beneficiary thereunder. This chapter discusses the complexities surrounding lien and stop notices on construction projects and how their existence can create delays and obstacles to completion.

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15.2. Construction Bonds In general, several types of surety bonds serve many purposes. For the construction industry, however, the types of bonds commonly issued are more limited. A discussion of each is provided in the following sections.

15.2.1. Performance Bonds A surety issues a performance bond to guarantee satisfactory performance by the contractor, or bond principal. In this respect, the purpose of the performance bond is straightforward: it provides available funds to complete the principal’s contract should the latter be in default of the performance it owes the obligee. Almost all states require a writing signed by the party to be charged as a condition precedent to enforcement of a promise of suretyship.1 Like any other surety bond, performance bonds create a tripartite relationship consisting of the bond obligee, the bond principal, and the surety.2

15.2.2. Labor and Materials Payment Bonds A labor and materials payment bond, or “payment bond,” guarantees that a contractor will pay suppliers, laborers, and subcontractors (subject to contract terms) for labor and materials. Often, payment and performance bonds are issued together as one bond and termed a “performance and payment bond.” Because a payment bond guarantees the owner that subcontractors and suppliers will receive the monies that the principal owes them, an owner benefits indirectly from a payment bond. With a payment bond in place, subcontractors and suppliers (1) are ensured of payment, (2) will continue performance, and (3) will refrain from recording liens on the property on a private project or filing stop-payment notices on a public project. If the principal fails to pay the subcontractors or suppliers, they may collect from the principal or surety under the payment bond, up to the penal sum of the bond. The penal sum in a payment bond may be less than the total amount of the prime contract and is intended to cover anticipated subcontractor and supplier costs.

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15.2.3. Indemnity Bonds Unlike other performance bonds, a surety’s performance obligation under indemnity bonds is limited to reimbursing the obligee up to the penal sum for any cost of completion in excess of the unpaid contract balance at contract termination. Under this scenario, the surety has no control over completion by the obligee and the costs incurred therein. Although completion costs must be reasonable, the surety’s burden of proving unreasonableness may not be easily satisfied.3 Courts have interpreted indemnity bonds to cover consequential damages as well, including, but not limited to, delay and lost profits.4

15.2.4. Subdivision Bonds Subdivision bonds often take the form of performance, payment, and monument bonds and are controlled by the same statutes governing subdivision growth. The law relating to subdivision bonds is entirely a creature of legislation. In California, the Subdivision Map Act controls and governs the subdivision of land.5 It was intended to regulate and control the design and improvement of subdivisions with consideration of their relation to adjoining areas. To ensure consistency of subdivision design and improvements with local standards concerning public health and safety, local agencies are permitted to require that subdividers satisfy certain conditions for approval (with respect to public improvements) in exchange for the agency’s approval of the tentative and final tract maps for the subdivision. If the subdivision improvements are not completed when the final tract map is recorded (which is often the case), the local agency can require the subdivision to enter into a subdivision improvement agreement to ensure the completion of such improvements by a given deadline. To ensure the completion of the required subdivision improvements, the public agency may require the developer to post security, usually in the form of corporate surety bonds. Indeed, in California, public agencies do not have the option of requiring security from the developer, but instead are required under the Subdivision Map Act to obtain sufficient security. The purpose is to ensure the completion of proper improvements so that the area does not become an undue burden on the taxpayer. Further, if the public agency accepts subdivision bonds as security, it must require both a performance and a payment bond. The public agency determines the amount of security required to secure the

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completion of the subdivision improvements, but it typically equates to the cost to complete the bonded improvements. Although subdivision bonds are somewhat similar to traditional public works bonds, important differences often create disagreement as to whether subdivision bonds are considered “true” public works bonds. First, in a regular public works bond, the surety secures the performance of the contractor, whereas under a subdivision bond, the surety secures the obligations of the developer, which may not necessarily be the contractor. If the developer has separately retained a contractor to build the required improvements, and the contractor subsequently defaults, no privity of contract exists between the surety and the contractor. Indeed, the developer often experiences cash-flow problems and fails to pay the contractor, and, as a result, construction comes to a screeching halt. Because of this unique situation, sureties often find it necessary to directly monitor the progress of the builder to ensure the timely completion of the obligations secured by the subdivision bonds. Second, in a typical public works bond, the public agency is named as the obligee. Further, sureties can often use the remaining contract funds to complete the remaining work. However, under a subdivision bond, the surety does not have access to such funds, because the public agency was never under any obligation to pay the developer for the cost of the improvements. The consideration given by the public agency is the approval of the tentative and final tract map and thus the right to develop the subdivision. In some states, if the developer defaults before construction has even started, courts have held that the public agency is still permitted to make a demand against the surety under the subdivision bonds.6 Third, the primary distinction between subdivision bonds and other bonds is the scope of coverage. Unlike a public works bond, a subdivision bond guarantees only the public-improvement portion of the entire development. Further, the surety is generally not relieved until the improvements are finally completed and accepted by the governing authorities. Sureties are finding that few (if any) public agencies are inclined to accept improvements in piecemeal fashion but, instead, will wait until all of the required improvements are completed before performing an inspection for acceptance. The reason for such reluctance is that once the improvements are accepted, they become the responsibility of the public agencies to maintain and repair any defects (resulting after a standard one-year warranty period). In California, sureties are

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generally liable during this interim period for any damages caused to the improvements before the public agency’s acceptance.7 Finally, the limitation period between public works and subdivision bonds differs greatly. While typical public works bonds appear to provide broader coverage, the limitations period for making a claim on such bonds is typically limited to one or two years from the date of acceptance or completion of the project. For subdivision bonds, however, the limitations period runs from the date the notice of completion or cessation of labor is recorded. Further, the nature of a subdivision development often requires the developer to seek extensions of time to complete the improvements. Most subdivision bond forms include language that allows the public agency to grant such extensions without notifying the surety. As such, the surety’s exposure under a subdivision bond can often be extended to several years after the bond was first issued.

15.2.5. Bid Bonds Almost all public bid invitations, and many private invitations, require each bidder to provide bid security to ensure that the bidder will enter into the contract if it is determined to be the lowest responsible bidder. In short, a bid bond is a promise made by the surety, on behalf of the bidder, to the project owner that the bidder will take on the job if selected. The existence of a bid bond provides the owner with assurance that the bidder has the financial means to accept the job for the price quoted in the bid. Bid security has traditionally been between 5% and 10%. If the principal is awarded the contract but fails to enter into the contract, the surety may be liable under the bid bond for actual resulting damages, which usually consist of the additional cost of contracting with the next-lowest bidder up to the penal sum of the bond.

15.3. Liens and Stop Notices In addition to making a claim against a construction bond, other remedies for collecting payment on a construction project include recording a (1) mechanic’s lien or (2) stop-payment notice (commonly known as “stop notices” until recently renamed by statute). These

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statutory remedies are often accompanied by strict procedural requirements that must be satisfied to perfect a claim.

15.3.1. Mechanic’s Liens Procedural Background A mechanic’s lien is a security interest in the title of private, real property for the benefit of those who have supplied labor or materials that prove the liened property. A mechanic’s lien carries the same function as a lender’s deed of trust or tax lien. A mechanic’s lien can only be recorded on private property, whereas on public property a stop notice serves the same purpose and will be addressed in further detail later. A mechanic’s lien is “is in the nature of a mortgage and an action for its foreclosure resembles a proceeding to foreclose a mortgage; the same procedural and substantive principles are generally appropriate in both cases.”8 Accordingly, after obtaining judgment, the claimant’s remedy is to foreclose upon the property and collect the judgment from the proceeds of a sale of the subject property to a third party.9 Intended Claimants The scope of proper claimants entitled to enforce a mechanic’s lien is set forth in Civil Code Sections 8400 and 840210: 8400. A person that provides work authorized for a work of improvement, including, but not limited to, the following persons, has alien right under this chapter: (a) Direct contractor. (b) Subcontractor. (c) Material supplier. (d) Equipment lessor. (e) Laborer. (f) Design professional. 8402. A person that provides work authorized for a site improvement has a lien right under this chapter.

In general, those who did not provide labor or materials that were permanently incorporated into the work of improvement, such as a

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supplier to another material supplier (i.e., second-tier supplier), are not entitled to enforce a mechanic’s lien.11 Mechanic’s Lien Priority and Relation Back The default rule of priority of security interests in real property is the “first-in-time” rule, which gives effect to competing security interest based on which was first recorded with the relevant county recorder’s office.12 The logic is that recording a security interest in real property places the world on constructive notice of the interest. Based on this same logic, mechanic’s liens relate to the commencement of the subject work, not merely recordation of the lien itself.13 Preliminary Notice To enforce mechanic’s lien rights, the claimant must give notice that the private work of improvement has begun. This “preliminary notice” should generally include the name and address of the owner, general contractor, and construction lender (if any); the name, address, and relationship of the party providing notice; a general description of the work being performed; an estimate of the total price of work; and a statement that the work may create lien rights.14 Except for prime contractors and laborers, all claimants seeking to enforce a mechanic’s lien must serve a preliminary notice. The failure to properly serve a preliminary notice when required by law is a complete defense to an action to foreclose upon a mechanic’s lien. The failure to serve a preliminary notice in a timely manner may be cured by serving the notice belatedly. Nevertheless, the claimant may only recover monies for labor and/or materials furnished in the 20 days immediately before service of the late notice.15 In addition to a preliminary notice, lien claimants must also serve a copy of the mechanic’s lien and a “notice of mechanic’s lien” in the form required under Civil Code Section 8416 to the owner.16 Failure to serve the notice of mechanic’s lien and mechanic’s lien (in conformity with Civil Code Section 8416) renders the mechanic’s lien defective and, thus, unenforceable. Contents and Timing of Mechanic’s Lien Being Recorded The contents of a mechanic’s lien must include the following: (1) the amount claimed, (2) the name of the owner or reputed owner, (3) a

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general statement of the kind of work furnished by the claimant, (4) the name of the person by whom the claimant was employed, (5) a description of the site sufficient for identification, and (6) the claimant’s address. The lien must be recorded in the office of the county recorder where the work of improvement is located.17 If no notice of completion or cessation has been recorded, the deadline for recording a mechanic’s lien is 90 days after completion of a work of improvement. If a notice of completion or cessation has been recorded, the deadline for all claimants other than a direct contractor is 40 days after recordation of a notice of completion or notice of cessation, and the deadline is 60 days after recordation for a direct contractor.18 Amount of Lien A mechanic’s lien is limited to the reasonable value of the work provided or the contract price, whichever is less. Attorneys’ fees, even if authorized by contract or statute, are not recoverable as part of a mechanic’s lien claim.19 A claimant is entitled to recover 10% simple interest on the liquidated principal balance.20

15.3.2. Stop Notices A stop-payment notice (or “stop notice”) is a remedy available in both public and private works of improvement wherein unpaid direct contractors, subcontractors, or suppliers may serve a stop-payment notice that confers personal liability on the party in possession of construction funds unless that entity withholds sufficient funds to answer for the claim. In private works projects, a proper claimant may serve a stoppayment notice on the owner or lender. On public works projects, a proper claimant may serve a stop notice on just the owner or the applicable public agency. The differences in procedural requirements on public and private works projects are discussed in the following sections. Private Works Projects Any claimant entitled to serve a mechanic’s lien may also serve a stoppayment notice. Nevertheless, a direct contractor may serve a stoppayment notice on the lender but not on the owner.21

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Information included in stop notice Other than a direct contractor or laborer, all stop-payment-notice claimants must serve a preliminary notice in the form required by the Civil Code. A stop-payment notice must include information similar to that required for a mechanic’s lien: (1) the name and address of the owner, direct contractor, and construction lender (if any); (2) the name, address, and relationship to the parties of the person giving notice; (3) a description of the site where work was performed; (4) a general description of the work to be provided; (5) the name of the person to or for whom the work is provided; and (6) an estimate of the value of the work to be performed.22 Bonded versus unbonded stop notice Whether a stop notice is bonded or unbonded results in different levels of protection and recovery for the claimant. On a private works project, an unbonded stop notice imposes a duty on the owner to withhold a sufficient amount of monies to satisfy the claim unless a payment bond has been recorded. Failure to withhold sufficient funds renders the owner personally liable for the amount of funds the owner failed to withhold. Only a bonded stop notice, in favor of the lender in the amount of 125% of the claim, imposes a duty on the lender to withhold funds.23 In any action against the owner or lender to enforce a bonded stop notice, the prevailing party shall be entitled to recover its attorneys’ fees.24 Attorneys’ fees are not recoverable, however, in an action to enforce an unbonded stop notice. A prevailing plaintiff is also entitled to recover interest at the legal rate calculated from the day the stop notice was served.25 Filing deadlines A claimant must file a lawsuit to enforce a stop notice no earlier than 10 days after service of the stop notice on the owner or lender but no later than 90 days after the deadline to record a mechanic’s lien.26 Public Works Projects In general, the stop-notice remedy on public projects operates similarly as in the private works context. However, no lender serves on a public works project—only the public agency.

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Proper claimants Although a direct contractor may not serve a stop notice on a public work of improvement, all other claimants entitled to serve a stop notice on a private project may also do so on a public project.27 Preliminary notice Unlike private works projects, first-tier subcontractors on public works project need not serve a preliminary notice prior to enforcing a stop notice. That aside, the other rules applicable to private works projects also apply to public works projects. A stop notice must provide a general description of the labor and/or materials furnished, an estimate of the total value of the work to be performed, and the name of the entity with which the claimant contracted.28 Deadlines A direct contractor may file a stop notice prior to the time when payment is due on the condition that the stop notice is limited to labor and/or materials furnished as of the date the stop notice is served. The deadline for serving a stop notice is 30 days after recordation of the notice of completion or cessation or 90 days after completion.29 Unlike private projects, a claimant on a public project does not need to serve a bonded stop-payment notice to impose a mandatory duty to withhold contract funds. The stop notice must be served on the director of the public agency that issued the project solicitation. A lawsuit to enforce a stop notice can be filed no earlier than 10 days after service of the stop notice but no later than 90 days after expiration of the period in which stop notices must be filed.30

Endnotes 1. Restatement (Third) of Suretyship and Guaranty section 11 cmt. A (1996). 2. See Restatement (Third) of Suretyship and Guaranty section 1 (1996). 3. See Prudence Co. v. Fidelity & Deposit Co. of Maryland., 297 U.S. 198 (1936); Schmidt Bros. Construction Co. v. Raymond Y.M.C.A. of Charles City (Iowa 1917) 163 N.W. 458, 462 (owner “not required to submit the cost of completing the structure to competitive bidders, nor to complete the same at the lowest possible cost, but had the right to expend such sum for labor and material as was fairly and reasonably necessary”).

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4. See Capua v. W. E. O’Neil Construction Co. (Ill. 1977) 367 N.E.2d 669; Bossier Medical Properties v. Abbott and Williams Construction Co. of Louisiana, Inc. (La.Ct. App. 1990) 557 So. 2d 1131. 5. Government Code section 66410 et seq. 6. City of Merced v. American Motorist Ins. Co. (2005) 126 Cal.App.4th 1316. 7. City of Sacramento v. Trans Pacific Industries, Inc. (1979) 98 Cal.App.3d 389, 397. 8. Laubisch v. Roberdo (1954) 43 Cal.2d 702, 709. 9. See Code of Civil Procedure section 2 701.450, 701.570, 716.010-030. 10. See Code of Civil Procedure sections 8400, 8402. 11. See Business and Professions Code section 7031(a); United Rentals Northwest, Inc. v. Snider Lumber Products, Inc. (2009) 174 Cal.App.4th 1479, 1484. 12. Civil Code sections 1214, 2897. 13. Civil Code section 8450. 14. Civil Code sections 8101, 8102. 15. Civil Code section 8204. 16. Civil Code section 8416. 17. Civil Code section 8416(a). 18. Civil Code sections 8412, 8414. 19. Abbett Electric Corp. v California Fed. Savings & Loan Assn. (1991) 230 Cal.App.3d 355, 360. 20. Forsgren Associates, Inc. v. Pacific Golf Community Development LLC (2010) 182 Cal. App.4th 135, 158-160. 21. Civil Code sections 8530, 8520(a). 22. Civil Code sections 8102(a), 8502. 23. Civil Code section 8536. 24. Civil Code section 8558. 25. Civil Code section 8560. 26. Civil Code section 8550. 27. Civil Code section 9100. 28. Civil Code sections 8102, 9352. 29. Civil Code section 9356. 30. Civil Code section 9502.

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Chapter 16

Insurance Issues: Construction Claims of a Different Nature Scott C. Turnera

16.1. Introduction Various insurance policies insure their policyholders for different classes of liability risks and property-loss risks that arise on construction projects. Engineers have two major interests here: understanding and protecting their own insurance coverage and understanding the coverage issues facing the other parties on their construction projects. To protect the owner, the general contractor, or both, the contract documents for a construction project usually specify what insurance coverage the major participants at the project are required to hold. Insurance coverage is one of the most complex areas of the law. The information in this chapter provides a basic, general introduction. Worlds of complexity and many exceptions lie behind every statement made here. The proper handling of every aspect of insurance as it relates to a construction project requires highly developed professional expertise. Just as insurance personnel should not attempt engineering, engineers should not attempt insurance work unassisted by an insurance professional. Nevertheless, engineers, like every other party involved on a

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a project, must have a basic understanding of the activities going on around them and be especially aware of traps posing a particular danger to their own interests. This chapter will provide a general overview of this subject, demystify much of the confusing trade jargon, and point out some of the most lethal traps for the unwary.

16.2. Greatest Potential Trap Important insurance coverage rights can be lost by the failure to (1) promptly notify the insurance company when potentially covered claims arise and (2) preserve evidence related to that claim that could become lost, such as by repairing or replacing a design or construction defects. Therefore, all parties—especially the injured parties asserting claims—must consider the insurance-coverage aspect of those claims and seek professional legal advice about them from the very beginning of the problem, as opposed to relying solely on the contract rights between the parties to resolve the claim. Both are important and should be considered and pursued in tandem. Similarly, this is not a time for hiding a mistake or wishfully thinking that a problem does not really exist (or that it will simply go away). By the time you are forced to face reality, critically important insurance coverage rights may have been lost, thereby making the original problem much worse. Again, except for very small claims, the appropriate response in these situations usually requires the immediate involvement of an insurance coverage lawyer or other highly trained insurance professional. Among other things, the coverage lawyer will determine if and when notice of a claim should be made to the insurance company and what critical supportive evidence needs be documented or otherwise preserved. Chapter 15 deals with the closely related topic of bonds and bonding on construction projects.

16.3. Common Construction-Related Insurance Policies As discussed in the following sections, there are seven types of insurance policies that are commonly encountered on construction projects and a long list of less common policies.

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16.3.1. Professional Liability Policies These policies are also known as “errors and omissions policies” and “E&O policies.” Professional liability coverage is third-party coverage, meaning it protects the policyholder against liability claims and lawsuits from third parties. (The policyholder is the “first party.” The “second party” is the insurance company. The claimant against the policyholder is the “third party.”) Specifically, a professional liability policy covers the policyholder’s liability to others arising from errors and omissions committed by the policyholder in providing “professional” services, as that term is defined in the policy, such as most engineering, architectural, and construction management work. Most professional liability policies are “claims-made” policies. This means that to be covered by the policy, (1) the policyholder’s conduct leading to the liability must occur during the period of time covered by the policy (including an extension backward in time to an agreed-upon “retroactive date”) and (2) the claim must be made against the policyholder during the policy period (including any additional “claimperiod” extension beyond the policy period). Because design defects may not be discovered for years after completion of the project involved, it is advisable that either the policy’s agreed-upon “retroactive date” extend back in time to the appropriate degree or that the “claim period” within which the claimant must bring its claim extend forward in time as appropriate. These two aspects of claims-made coverage are also referred to as “nose coverage” and “tail coverage.” The dollar limits of coverage are stated in the policy in two ways: a per-claim limit and an aggregate of all claims limit for the policy period. For example, a policy might have a $1 million per claim limit and a $2 million aggregate limit for all claims arising during a one-year policy period. Professional liability policies usually include both a duty to pay the policyholder’s defense costs and a duty to pay settlements and judgments. Defense costs are included with—and therefore reduce— the dollar limits of professional liability policies such that the ongoing costs of defending the policyholder reduce the dollar amount of coverage remaining for eventually settling the case or paying a judgment after trial. Unless an early settlement of the claim is achieved, this can significantly erode the amount available under the policy to pay claims, posing a major concern for both the policyholder and the claimants.

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Unlike other policies, professional liability policies do not provide additional insured coverage (see discussion in Section 16.4.4) for nonprofessionals, such as the project’s owner and general contractor on it. As a result, the protection afforded to owners and general contractors by the professional liability policy is indirect: They must prosecute a claim against the design professional to reap the benefit of that policy but are at least ensured of a deep pocket on covered claims if they do. For larger projects, the policy limits of the professional liability policies normally maintained by individual design firms are often too low and inadequate for the enormous liabilities that are potentially involved. Besides the design professional, this leaves the project owner and other potential claimants on the project exposed to catastrophic design-related liabilities. As a result, project-specific policies are often used, providing much higher and more appropriate policy limits. (For owners, general contractors, and construction managers concerned with the problems mentioned, two other types of insurance policies address these concerns: an owner’s protective professional liability and indemnity policy and the contractor’s protective professional liability policy. Each directly covers these types of policyholder for design negligence–caused damage to, or loss of property at, the project in which the policyholder has an interest. Each also covers the policyholder for its vicarious liability to third parties arising from the professional negligence of its design professionals on the project. Among other things, these policies allow the policyholder to purchase policy limits adequate to meet the risks involved.) No standard, uniform professional liability policy form exists. Each insurance company has its own distinctive policy form. As a result, coverage tends to vary from company to company and from form to form, requiring that forms being considered be closely scrutinized for their coverage features. Notwithstanding this variation, several exclusions are commonly found in most professional liability policies: • An exclusion for willful or reckless acts; • An exclusion for fines and penalties imposed by governmental agencies; • An exclusion for contractual penalties and liquidated damages; • An exclusion for the faulty workmanship of contractors under the management of the policyholder; • An exclusion for delay damages;

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• An exclusion for pollution-related liability; • An exclusion for liability arising from a guaranty or warranty; and • An exclusion for claims between two policyholders insured under the professional liability policy, such as a construction management company asserting a claim against the project engineer, where both were related entities and named insureds under the same professional liability policy.

Sometimes, the contract between the design professional and the owner imposes a higher standard of care on the design professional than the ordinary professional negligence standard of care covered by most professional liability policies. This leaves a potentially uncovered gap for breaches of contract that fall within that higher standard of care, above the ordinary standard of care. Depending on market conditions, augmentation of coverage under the policy to cover that disparity may be available. Unlike the more common commercial general liability (CGL) coverage discussed in the following section, professional liability policies usually cover all liabilities, including purely economic damages such as diminution in the value of the work of improvement, without any requirement that these damages be the result of property damage or bodily injury. In addition to engineers and architects, many construction managers also procure professional liability policies, as at least some of their work may be considered professional in nature, putting it outside of the coverage provided by their CGL policies, particularly if those policies include professional liability exclusions. Contractors whose work includes a significant design component, such as those with design-build contracts, expose themselves to liability for professional services and expose the project owner, the general contractor, the project manager, and others on the project to such liability. Therefore, where a contractor at any level provides designbuild services, maintaining appropriate and adequate professional liability coverage should also be required.

16.3.2. Commercial General Liability Policies Commercial general liability coverage is also third-party coverage, meaning it protects the policyholder against liability claims and lawsuits from third parties. Specifically, the CGL policy insures against damages

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awarded because of bodily injury or property damage arising from the policyholder’s business operations. “Property damage” is defined in the policy to include both physical injury to tangible property and loss of use of tangible property. The latter might include liability for a manufacturing plant that was forced to shut down for an extended period because of an accident during construction work on a part of it. Because the policy covers damages “because of” property damage, it covers more than property damage and bodily injury themselves. It also covers all damages flowing from covered property damage and bodily injury, including economic damages such as lost profits. Typically, CGL policies are written on standardized forms. Most are “occurrence” policies rather than “claims-made” policies, meaning that the policy covers accidents happening during the coverage period, which is usually a one-year period. Under the standard forms, the costs of defending the policyholder are treated as being in excess of the policy’s dollar limits, such that they do not erode the policy limits needed to eventually settle or pay judgments after trial. All businesses of whatever type should be covered by CGL policies. Design professionals typically have a CGL policy for any nonprofessional liabilities they may incur, such as when a visitor trips and injures himself or herself in their office. In contrast, for contractors of every tier, CGL coverage is typically their most important coverage for purposes of construction defect and project-related contract claims. Because the frequency of such construction defect and contract claims against contractors vastly exceeds that of design-defect claims, the various contractors’ CGL policies usually have the largest role to play in covering such claims and disputes. Many contractors are undercapitalized for the catastrophic liabilities that can flow from property damage or bodily injury that potentially results from their work. Often, that liability flows upstream to the project’s general contractor and/or owner. For that reason, to help protect themselves, owners and general contractors typically require their contractors to maintain substantial CGL coverage. Note that the benefits of this coverage usually survive the insolvency and bankruptcy of the policyholder. The following highlight major CGL policy provisions: • Trigger of coverage—Property damage or bodily injury occurring during the time period covered by the policy, referred to as the “policy period,” usually triggers coverage under a given CGL

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policy. However, once that requirement is met, any property damage or bodily injury occurring in other years may also be covered, riding into coverage on the coattails of that property damage or bodily injury occurring during the policy period. • Policy limits—The dollar limits of coverage are stated in the policy in two different ways: (1) either as a “per occurrence” limit or a “per claim” limit and (2) an aggregate limit as to the maximum coverage available under the policy regardless of how many claims or occurrences take place. • Defense coverage—Statistically, about half of an insured company’s total out-of-pocket costs in sophisticated commercial litigation like construction claims comes from the cost of attorneys, experts, court costs, etc., and only half from actually paying settlements and judgments. So, the fact that CGL policies cover most, if not all, of a policyholder’s costs of defense is not merely incidental, it actually represents about half of the policyholder’s total financial exposure on claims against it. Fortunately, the rules for determining whether or not a claim triggers the CGL insurance company’s duty to defend are generously in favor of coverage: Usually, if the mere possibility exists that the claim includes a covered part, the insurance company must defend the policyholder. Sometimes, the insurer’s duty to defend the policyholder even includes the costs of pursuing the policyholder’s affirmative claims against others where the other party had set off the amount of its claim from monies it otherwise owed the policyholder. • Coverage for policyholder’s defective work—CGL policies are drafted to cover many, but not all, instances of property damage to the policyholder’s own work. Separate exclusions exist for property damage to a policyholder’s ongoing operations and damage to its completed operations, but both exclusions go on to state exceptions that leave many instances of damage to work in both scenarios covered. For instance, the exclusion for the policyholder’s completed work excepts from the exclusion damage to work performed by the policyholder’s subcontractors and property damage to the policyholder’s own work caused by its subcontractor’s work. Of course, many general contractors perform all their work through subcontractors, so the exclusion should have no effect on them whatsoever. The law of many states upholds this intended coverage. However, many other states negate most, if not all, of this coverage,

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often on the public policy rationale that to honor such coverage would impermissibly encourage shoddy workmanship. This is a particularly complex, nuanced, and difficult issue of law, calling for coverage attorneys who are deeply experienced with it. Unfortunately, many attorneys in the construction industry have adopted an erroneous rule of thumb that CGL policies never cover damage to the policyholder’s own defective work. If you come away remembering one thing from this chapter, it should be that CGL policies may cover property damage to the policyholder’s own work (and all consequential, economic damages flowing from it) and that possibility should be thoroughly explored with experienced coverage counsel, particularly on large claims. • No coverage for expected or intended property damage or bodily injuryaccidents required—The CGL policy contains an exclusion for property damage or bodily injury the policyholder expected or intended to cause. So, if a roofing contractor knows its work is so poor that it fully expects the roof to leak, or if the contractor deliberately sabotages the roof work intending to cause property damage after an argument with the owner, the exclusion bars coverage under the policy. Separately, the policy also requires that the property damage or bodily injury be the result of an accident. • Coverage for indemnity and hold-harmless obligations—As discussed in greater detail in Section 16.4.3, CGL policies cover a policyholder’s indemnity obligations to a third party, such as a subcontractor’s obligation to the general contractor or project owner under a holdharmless agreement in the project’s contract documents, to the extent that this liability otherwise falls within the provisions of the policy, i.e., property damage or bodily injury caused by an accident with none of the exclusions applying, etc. • No coverage for a policyholder’s products—CGL policies contain an exclusion for property damage to a policyholder’s own products. However, this does not apply to contractors, because their work is deemed to be “work,” as opposed to a manufacturer’s “product.” Moreover, the policy deems a contractor’s “work” to include and provide coverage for building materials, etc., that the contractor uses as part of its “work,” even though those same materials would be considered to be “product” and not be covered under its manufacturer’s policy. A gray area arises such as in a situation where a policyholder custom fabricates building components offsite according to plans and specifications.

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• Many other exclusions—The CGL policy contains many other exclusions, often having to do with risks insured by other policies (e.g., automobile accident-related liabilities), so overlap and duplication of coverage do not occur among different policy types.

16.3.3. Excess and Umbrella Liability Policies Excess and umbrella liability coverage provides additional coverage over the primary layer of coverage, such as an additional $5 million in excess coverage over a $1 million primary CGL policy. Follow-form excess policies (sometimes referred to as “pure excess”) simply follow the terms of the underlying primary policy, except where any differences in coverage are specifically called out. Umbrella policies provide excess coverage but also provide broader coverage than the underlying primary policy in some respects, thereby becoming primary coverage when a particular liability triggers broader coverage provided in the umbrella policy but not in the primary policy.

16.3.4. Builders Risk Policies Builders risk insurance is first-party property insurance, meaning that it insures the policyholder against loss or damage it experiences during construction to its interests in the property at the project, including some losses arising from the negligence of contractors and certain “acts of God.” Builders risk coverage is often called “all risk” insurance, even though it certainly does not cover all risks. Instead, the term reflects the drafting approach to the policy: The policy begins by covering all risks of physical loss or damage to the specified property and then excludes certain risks or causes of loss through the policy exclusions that follow. So, if a risk or cause of loss is not excluded, it is covered. Because the policy contains many exclusions eliminating coverage for various risks, do not be deceived by the name “all risk policy” into thinking that the policy actually covers all risks. (The alternative drafting technique, known as a “named perils” policy, covers only stated risks and causes of loss, such as loss from theft, fire, etc.) Builders risk policies typically name as covered insureds the owner, prime contractors, and subcontractors of every tier, design professionals, and any necessary financing parties— basically, everyone with a financial interest in the property.

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The policy should cover the full value of the completed project, with the time period of coverage extending to the date of project completion, including any extensions for delay. After completion, when the builders risk policy typically expires, another form of property insurance, a regular commercial property policy, should be procured. No uninsured gap between the dates of those two policies should occur. “All risk” builders risk policies cover the cost to repair physical damage or replace property losses caused by covered events during construction. The basic builders risk policy excludes consequential damages and similar losses resulting from covered damage or loss. However, coverage extensions can be purchased to cover many of these consequential losses. Unlike CGL policies, builders risk policies are not written on standard forms. Therefore, the proposed policy form must be professionally reviewed to ensure that it includes essential coverage provisions. Both builders risk policies and the contract documents governing the project typically provide waiver of subrogation provisions. In contrast, other policies, such as the CGL policy, allow for insurer subrogation. That is, they allow an insurance company that pays a policyholder’s claim to step into the latter’s shoes to sue the responsible party for causing the loss or liability for the purpose of recouping some or all of the monies the insurance company paid out. With builders risk policies, the parties to the project, by way of the contract documents entered into at the beginning of their relationship, waive any claims they (or their insurance companies) may have against one another to the extent covered by the builders risk policy, and the builders risk policy anticipates and approves this. Thus, a loss covered by a builders risk policy stays with the insurance company. The parties to the project are thereby both protected and relieved of fault allocation and disputes over responsibility for the loss, making for a more harmonious project. An example of a covered builders risk loss would be a fire negligently started by a welding subcontractor that destroys a substantial part of the project, thereby affecting the interests of the owner, construction lender, and all contractors to the extent they are as yet unpaid for fire damage to work they had performed. Everyone’s interests in the damaged or destroyed property would be covered, even the interests of the negligent welding subcontractor. The one exception to this principle is that builders risk policies contain an exclusion for faulty workmanship. Therefore, if the faulty

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work of a roofing subcontractor causes extensive water damage at a project that requires replacement of both the resulting damage to the interior parts of the building and the deficient parts of the roof to prevent future damage, the former is covered but the latter is not.

16.3.5. Environmental/Pollution Policies Many environmental and pollution liabilities, including liabilities for mold-related property damage or bodily injury, are often excluded from professional liability, builders risk, and CGL policies. Specialized policies covering environmental risks are generally available to cover these risks. While they typically cover pollution resulting from operations performed by or on behalf of the policyholder at a jobsite, they generally do not cover preexisting pollution at the property.

16.3.6. Workers’ Compensation and Employers’ Liability Policies Workers’ compensation policies cover bodily injury to employees occurring in the course of their employment. All parties to a project with employees working there must be covered by workers’ compensation policies providing statutorily required limits. This can be done with a projectwide insurance program or by each party maintaining its own policy. CGL policies exclude coverage for bodily injury to a policyholder’s own employees, and workers’ compensation policies do not cover all such bodily injury claims. Employers’ liability policies fill this gap. They are typically issued in tandem with the workers’ compensation policy.

16.3.7. Wrap-Ups and Controlled Insurance Programs Under traditional construction industry insurance arrangements, each party to the project procures its own insurance. As an alternative to this traditional arrangement, a single-party sponsor (such as the owner, construction manager, or general contractor) can purchase an all-encompassing insurance program for that project, known as a “wrapup” policy or “controlled insurance program” (CIP; pronounced “sip”). If the owner purchases the policy, it is called an “owner-controlled insurance program” (OCIP; pronounced “oh-sip”). If a general contractor

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purchases the policy, it is called a “contractor-controlled insurance program” (CCIP; pronounced “see-sip”). Under a CIP, the sponsor procures a bundle of different types of insurance coverage for all enrolled parties, covering them while they work on the project. Most CIPs include workers’ compensation and general liability coverages (both primary and umbrella or excess liability insurance). Builders risk, professional, pollution, and other coverages can also be bundled in a CIP. The sponsor of the CIP requires all enrolled parties to remove the cost of their own insurance from their bids, with respect to the types of coverage included in the CIP.

16.3.8. Many Other Insurance Policies Potentially Involved While the foregoing are the major policies and forms of insurance coverage involved in construction projects, many others exist: inherent defects insurance, fronting policies, captive insurance and reinsurance, self-insurance, risk retention groups, CGL gap policies, owner and contractors protective (OCP) liability policies, installation floaters, equipment floaters, boiler and machinery insurance, directors and officers insurance, business interruption insurance, rigging coverage, difference-in-conditions coverage, rip and tear coverage, efficacy or system performance coverage, force majeure insurance/delayed completion insurance, employment practices liability insurance, subcontractor’s default insurance (subguard) policy, political risk insurance, the Bermuda form, and other forms of international insurance policies, to name a few. To make matters more confusing, a given insurance policy may not come labeled with its generic type, instead bearing a marketing name.

16.4. Insurance Basics The following sections provide an overview of the most commonly encountered aspects and issues involving insurance on a construction project.

16.4.1. Players in Insurance Procurement and Claims The parties primarily involved in insurance policy procurement and claims include the policyholder (contractor, subcontractor, owner, etc.),

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an insurance broker or agent, and various insurance company representatives. Insurance agents and brokers are intermediaries between the policyholder and the insurance company. Informally, the terms are often used interchangeably, but, technically speaking, an insurance agent represents the insurance company and an insurance broker represents the policyholder. Insurance companies employ various categories of people who are potentially involved in a policyholder’s insurance issues: Underwriters analyze the risks facing the applicant for a policy, determine the insurability of that risk, and determine the terms and price of coverage appropriate for the risk. When a loss or liability claim occurs, a claims adjuster represents the insurance company in analyzing the facts of the claim, interprets the policy wording, accepts or denies the claim, and, if the claim is accepted, determines and offers payment in a specific amount. Claims adjusters may be employees of the insurance company or of outside companies hired to adjust the claim. Both policyholders and insurance companies often involve insurance coverage attorneys in the claims process, particularly on larger claims.

16.4.2. Construction Contract Insurance Requirements Clauses The contract documents for a project almost universally specify the insurance coverage each participating party will provide. For example, Article 5.04 of Engineers Joint Contract Documents Committee (EJCDC) C-700, Section 11.1.1 of American Institute of Architects (AIA) A2012007, and Article 10.2 of ConsensusDocs 200 require that the general contractor cover itself with a CGL policy, workers’ compensation policy, and business auto policy. Article 5.06 of the EJCDC C-700, Section 11.3.1 of AIA A201-2007, and Article 10.3.1 of ConsensusDocs 200 require that the owner obtain property insurance for the project (usually in the form of a builders risk policy) covering loss or damage to property at the project during construction. The owner requires this insurance coverage on the project to protect its interests by ensuring that a deep pocket stands behind the potentially undercapitalized policyholder to satisfy its claims against that policyholder, particularly in the event of a catastrophic loss. Such coverage, particularly under property policies, can also reduce litigation and disruption between the parties to the project.

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16.4.3. Contractual Liability Coverage Interfacing with Indemnity/Hold-Harmless Agreements The contract documents on a project almost always contain indemnity clauses indemnifying the owner (and perhaps others) for any liability they may have that originates with another party at the project. For example, Article 6.20 of EJCDC C-700, Section 3.18 of AIA A201-2007, and Article 10.1 of ConsensusDocs 200 include indemnity clauses. The insurance-requirements clause in the project’s contract documents (discussed in Section 16.4.2) typically requires the general contractor’s CGL policy to provide “contractual liability coverage” (although that term does not appear in the body of the CGL policy itself), which backs up and covers the general contractor’s indemnity obligation to the owner to the extent that otherwise-covered property damage or bodily injury is involved. The CGL policy provides this contractual liability coverage in a very subtle and circuitous way, as the outcome of four separate provisions of the policy working together: 1. The insuring agreement contained in Section 1, Coverages, which typically provides that the insurance company “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies : : : .”1 2. A policy exclusion (usually denominated as exclusion 2(b)) excludes coverage for “‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”2 (The term “assumption” used here does not refer to agreeing to take on certain contractual responsibilities. Rather, it refers to the agreement to assume certain future liabilities of the other contracting party, such as by an indemnity agreement.) 3. However, that exclusion restores an important part of this coverage through an exception at the end of the exclusion, providing “[t]his exclusion does not apply to liability for damages : : : assumed in a contract or agreement that is an ‘insured contract,’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement : : : .”3 4. Finally, the term “insured contract” used in the exception in item 3 is defined in the policy as “[t]hat part of any other contract or agreement pertaining to your business (including an

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indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement : : : .”4

16.4.4. Additional Insured Status Insurance policies usually define and cover different categories of people and entities insured by the policy, generically referred to as “insureds.” “Named insureds” are those who are specifically named in the policy. The “first named insured” is typically the party that applied for and acquired the policy, is obligated to make the premium payments, and must satisfy the policy conditions such as reporting losses and claims. An “additional insured,” also known as an “AI,” is a party that is added as an insured under a policy with respect to certain projects or exposures as part of its business relationship with one or more of the named insureds. Being named as an additional insured under another’s policy, referred to “additional insured coverage” or “AI coverage,” is a recognized risk-management tool to allocate risk among the parties and their insurers on construction projects. Additional insured status gives the third-party additional insured direct rights under the named insured’s insurance so that the first party may avoid the need to fund its defense costs or pay settlements and judgments first and then wait to recover them later because of delays in the enforcement of an indemnification clause from the named insured. Typical examples of additional insured coverage in the construction context are project owners named as additional insureds under the liability policies of their general contractors and general contractors under the liability policies of their subcontractors. The amount of coverage provided to additional insureds varies greatly depending on which additional insured endorsements are used. This coverage can range from covering only claims arising from the named insured’s scope of work during a short period of time to nearly as much coverage as the named insured receives. An important coverage issue here is the degree to which the additional insured receives coverage for its own negligence, as opposed to coverage for the vicarious liability it receives from the named insured’s negligence. The various states come down differently on this issue.

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Builders risk policies generally insure owners and contractors of every tier, such that additional insured status is not required.

16.4.5. Certificates of Insurance Construction contract insurance requirements clauses, as discussed in Section 16.4.2, specify the particular insurance coverages, limits, and policy provisions required of various parties both during the project and for a specified period after completion of the project. Rather than needing all parties to provide copies of the entire contents of all their insurance policies as proof of compliance with contractual requirements, the certificate of insurance is used as a shortcut to verify that the agreedupon insurance requirements have been met. A certificate of insurance is a one- or two-page document identifying the insurance policies of the policyholder. A certificate of insurance does not generally amend the terms of the policies listed on it. Rather, it is usually a representation by the policyholder’s broker to the entity requesting proof that the stated insurance policies are in place with the dollar limits and time periods of coverage listed on the certificate and confirming that the recipient is an additional insured under the policy, if that is true. In some situations, the party seeking confirmation of compliance may be prudent to pursue further proof that the required insurance has been obtained. Copies of the actual policies, and additional insured endorsements to them, can provide that proof.

16.4.6. The Claims Process As discussed in the following sections, there are several distinct phases encountered in an insured’s pursuit of an insurance claim. Claims Identification and Investigation and Notice to the Insurance Company Construction claims covered by insurance can arise either before completion of all work on the project or after all work on the project is completed, sometimes long after completion. Claims that arise during ongoing operations at a construction project pose several dangers. On one hand, valuable insurance coverage rights may be lost if the claim, or potential claim, is not reported

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quickly to the insurance company before the problem is corrected and any necessary evidence of the problem is lost. On the other hand, rapid recovery from the problem may be critical to keeping the project on schedule. As a result, critical decisions may have to be made very quickly. Some companies have carefully thought-out written claims procedures. If not, a particular, knowledgeable company employee must be given responsibility for claims handling on the claim, including investigating and reporting internally on the claim, determining which insurance policies may be involved, notifying those insurance companies, making or responding to claims for indemnification from other parties at the project, preserving evidence, and tracking expenses or other damages as the claim progresses to resolution. Absent such a knowledgeable employee—particularly on potentially large claims— involving an insurance coverage attorney from the very beginning may be important. For example, the question of what is or is not covered under the policies is very complex, varying from jurisdiction to jurisdiction and turning on subtle distinctions of fact and law. In giving the required notice of a claim to the insurance company, a company cannot know how to describe the claim in a manner that best supports coverage, or what evidence to preserve for that purpose, until careful—but quick—investigation and legal analysis are conducted. Claims that arise regarding completed operations are less time sensitive, and the delicate handling of the claim from the beginning is less critical. Even so, the previously cited advice still mostly holds true here as well. As to both ongoing and completed operations claims, given the potential of losing coverage rights for failure to notify the insurance company promptly, notifying every insurance company that might potentially cover the claim is often best, including • The insurance companies providing coverage under the company’s own CGL policy; • The wrap-up policy, additional insured, and/or contractual liability coverage under the policies of others; • The builder’s risk policy; • The surety on any performance bond involved; and • The insurance company for the design professional’s professional liability policy if the claim potentially involves errors or omissions in the rendering of professional services.

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Letters providing notice of a claim or accident that may result in a claim must at a minimum give the insurance company the policy number, effective dates, named insured, description of the facts involved, any written demand or suit papers received from the claimant, applicable contract provisions supporting a right to additional insured coverage, any policy endorsements or certificates of insurance supporting additional insured coverage, and a demand for coverage under the policy, including defense coverage if applicable. Given the sensitivity of the task, these letters are best prepared by highly knowledgeable and trained company personnel or insurance coverage counsel. Claims Handling by Insurance Company After receiving a notice-of-claim letter, an insurance company typically assigns an insurance adjuster to investigate underlying facts. The same adjuster usually decides whether an insurance policy actually applies, although if unsure he or she may consult an insurance coverage attorney representing the insurance company on legal questions and expert consultants on technical, factual questions related to the claim. Under the terms of the policy, the policyholder generally has a duty to cooperate with the insurance company’s investigation during this stage. (However, this duty has limits, particularly in regard to information that might be used to deny coverage. Again, an insurance coverage lawyer makes this determination best.) After completing its investigation, an insurance company can respond to the policyholder in one of several ways: It can accept the policyholder’s demand for coverage, reject the demand for coverage on the basis that the policy does not cover the claim, or agree to defend the policyholder while reserving the right to later deny coverage when additional information about the claim becomes known. The last option is commonly exercised through a “reservation of rights letter.” Insurance Defense Usually, where an insurance company accepts the demand for coverage under a CGL policy, it may select a defense attorney to represent the policyholder on the claim and otherwise control most aspects of the defense. However, a CGL policyholder may be entitled to defend itself with attorneys of its own choosing in case the insurance company responds with a reservation of rights. Representation by a defense

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lawyer of the policyholder’s own choosing who is completely loyal to the policyholder’s interests is the preferable course. Most professional liability policies allow the policyholder to select his or her own defense counsel and otherwise control the defense of the case. Payment of Settlements and Judgments Where the insurance company has accepted the policyholder’s demand for coverage, it usually settles the case with its own money and at its own discretion as to the amount and timing of the settlement. Insurance Coverage Litigation If the insurance company denies coverage, either at the beginning of or later in the case, the policyholder (and its other insurance companies, if any) is (are) left to its (their) devices and may settle the case at its (their) discretion. This can be followed up with a lawsuit against the coveragedenying insurance company to recoup the costs of both the defense and settlement paid by the policyholder or any of its other insurance companies. In some cases, a court can determine the issues bearing on coverage of a claim while the claim is being litigated elsewhere, in what is known alternatively as either a declaratory judgment action or a declaratory relief action. In other cases, coverage cannot be determined until the exact nature of the facts leading to the liability is determined in the underlying lawsuit over liability. In these cases, the final determination of coverage can take a very long time: First, the liability case must be litigated all the way to a settlement or judgment (and sometime an appeal). After the liability case comes to a conclusion, usually years after initiation, the coverage lawsuit is filed and litigated to conclusion, usually over a period of several more years. Where the insurance company’s denial of coverage is not only wrong but is determined by the court to be in “bad faith,” it becomes liable not only in contract for the coverage that should have been provided but also in tort for any resulting, consequential damages—and for punitive damages.

16.5. Conclusion Basically, three types of claims arise from construction projects: contract claims, bond claims, and insurance claims. These can, and often do,

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overlap with one another. For example, bond claims are typically for nonpayment or default and often overlap with an underlying contract claim. The same is true for insurance claims. A claim for coverage under a professional liability policy frequently arises in response to a project owner’s contract claim against the design professional. Likewise, CGL policy claims for coverage of a contractor insured’s property damage liability can arise in response to a contract claim. Builders risk policies usually cover property losses that would result in a contract claim between the parties at a project if the insurer did not step in and pay for the loss. When a contract claim arises, another issue under consideration is whether or not bonds or insurance apply. If any chance exists that insurance applies, notify the insurance company immediately. Insurance coverage does not solve all problems, and it does not necessarily solve all aspects of the problems it does cover. Nevertheless, like the use of antibiotics in modern medicine, it either solves or greatly contributes to the resolution of many otherwise serious problems.

Endnotes 1. 2. 3. 4.

Section Section Section Section

I, Coverage A., 1., a. of the various CG 00 01 ISO form policies. I, Coverage A., 2., b. of the various CG 00 01 ISO form policies. I, Coverage A., 2., b. of the various CG 00 01 ISO form policies. V, 9., f. of the various CG 00 01 ISO form policies.

Chapter 17

Alternate Project Delivery: Claims in Design-Build, Guaranteed Maximum Price, and Other Delivery Methods Richard E. Burnhama and Mark F. Nagatab

17.1. Introduction to Changes in the Context of Alternate Project Delivery Methods Each alternate project delivery method produces unique challenges in dealing with changes. If change orders are to be successfully negotiated or claims effectively prevented or resolved, the analysis and management approach must be tailored to the nuances of each delivery method. A single chapter in a book like this could not possibly address every nuance of the spectrum of alternate project delivery methods that have proliferated in recent years. Further, because some of those methods, like public-private partnerships, are unique to each project and controlled by specific enabling legislation, project-specific risk allocations, and nontraditional terms and conditions, generalization is simply not appropriate.

a

Director (retired), Trauner Consulting Services, Inc. Shareholder and Director, Trauner Consulting Services, Inc.

b

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Accordingly, this chapter will focus on changes and claims in the context of guaranteed maximum price (GMP) contracts and design-build contracts. Note, however, that much of what is presented with respect to changes and claims in GMP contracts also can be applied to projects using (1) the integrated project delivery (IPD) method, (2) open book accounting (OBA), and (3) some other collaborative project delivery methods. Similarly, much of what is said about changes and claims in design-build contracts applies to engineer, procure, and construct (EPC) contracts and other project delivery methods that shift all or some of the design responsibility to the contractor.

17.2. Changes in the Context of a GMP Contract The following sets forth a number of points for the analyst to consider when dealing with alleged changes in the context of a project using a GMP format.

17.2.1. A Different Baseline for Measuring Changes in GMP Contracts Many owners choose the GMP format because it often allows them to shorten the overall time it takes to get from project conception to project completion. GMP contracts accomplish this by (1) enabling the parties to work collaboratively on budgets during design development and agree to a price (the guaranteed maximum price) before the plans and specifications are completed and (2) allowing the contractor to start work in the field before the plans and specifications are 100% complete. Not only do the parties know of this lack of completed plans and specifications at the time the GMP is set, but the GMP agreement often acknowledges it and explains the rights and responsibilities of the parties with respect to that incompleteness. In fact, most GMP contracts contain a provision that states something like the following: Contractor acknowledges that the plans and specifications for the work are not 100% complete. Contractor also acknowledges that owner is relying upon contractor’s representation that it has sufficient experience and expertise with the type of work to be

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performed for this project to provide owner with a GMP for a complete and functioning facility notwithstanding the fact that the plans and specification are not 100% complete.

This language varies significantly from what is typically understood on a traditional design-bid-build (D-B-B) project, where contractors have traditionally been protected from additional costs associated with incomplete plans and specifications by the understanding that they are entitled to rely upon an assumption that the plans and specifications are 100% complete. Under this traditional scenario, the owner is required to shoulder the uncertain financial risk associated with incomplete plans and specifications. However, at least some of this risk is shifted to the contractor in the context of a GMP contract by terms like that cited previously and by other typical provisions like the one quoted as follows. AIA A102 addresses how the stakeholders agree to handle the incompleteness of the contract documents in Section 5.2.5, where it states, To the extent that the Drawings and Specifications are anticipated to require further development by the Architect, the Contractor has provided in the Guaranteed Maximum Price for such further development consistent with the Contract Documents and reasonably inferable therefrom. Such further development does not include such things as changes in scope, systems, kinds and qualities of materials, all of which, if required, shall be incorporated by Change Order.1

The cumulative effect of these typical GMP contract clauses is that, in seeking to determine whether work that a contractor is required to perform constitutes a “change,” simply looking at the plans and specifications as they existed at the time the GMP was agreed to is not enough. Rather, accounting for whether or not a contractor with experience and expertise with the type of work involved in the project should have understood that the work in question would be a part of the plans and specifications for a complete and functioning facility is necessary. The resolution of an issue falling into this area can be problematic. It is a subject on which reasonable minds might differ. However, understanding how all the parts and pieces of a GMP contract work can help

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the contractor find a road map for working through the resolution of such an issue. Hopefully, the discussion that follows can serve as such a road map.

17.2.2. Changes Related to Less than 100% Complete Contract Documents The recognition that the plans and specifications are incomplete is the reason why most GMP proposals include • • • •

Exclusions (sometimes labeled exceptions), Assumptions (sometimes labeled qualifications), Allowance items, and A contingency.

These exclusions, assumptions, allowances, and contingency provide the parties with a way to address and manage the risk associated with the acknowledged incompleteness of the design. Accordingly, these provisions are among the first places to look when attempting to determine whether something is a “change” in the context of a GMP contract. In other words, among the first questions to ask when analyzing alleged changes in a GMP contract are the following. Does the GMP Include a List of Exclusions or Exceptions? If so, and if the contractor is subsequently required or directed to perform work that was specifically excluded from the GMP, identifying that work as a “change” in scope that entitles the contractor to a change in the GMP is easy.

Practice Tip A well-thought-out GMP proposal should articulate not only what the contractor has priced but also what the contractor has not priced. This makes sense and should not be considered by the owner or designer to be a negative aspect of a GMP proposal. To the contrary, the more completely the parties discuss and agree upon a precise articulation of the scope of the specific work items that are excluded, during the preconstruction period and during the time that they are negotiating

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the GMP, the lower the chance of misunderstandings and disputes later on down the road. Exclusions leave the entire risk of the uncertain cost of the excluded work to the owner. If a contractor is directed to perform work that was specifically excluded from the GMP, 100% of the cost associated with that work (together with the appropriate markups) should be included in a change order that increases the GMP. Further, if the addition of this excluded work results in a delay to the project and all applicable contractual conditions are met, the contractor may be entitled to an extension of the time for performance of the work and an increase in the GMP equal to the additional time-related and general-condition costs incurred because of the delay. Does the GMP Include Any Assumptions or Clarifications? If so, and if the contractor explained in its GMP proposal that the GMP was based on the use of a certain product, material, or equipment and the owner subsequently requires the contractor to use different materials, products, or equipment, then that would also qualify as an easy “change” to identify. This is another instance in which the contractor would be entitled to a change in the GMP.

Practice Tip If some aspect of the work is not clearly or completely set forth in the plans or specifications, the GMP proposal is the best place for the contractor to articulate the assumption upon which its price is based. If that assumption contradicts what the owner wants or the designer intended, resolving those differences during the GMP negotiation phase is best. Also, note that it is incumbent upon the owner to make sure that the designer is not only aware of all such assumptions and clarifications, but that the designer addresses and accounts for each of those assumptions and clarifications as it proceeds to complete the plans and specifications. To the extent that the designer completes the plans and specifications in accordance with the stated assumptions, the risk of the uncertain cost of that work is on the contractor. If a contractor is directed to perform work or provide materials or equipment that differs from what the contractor

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articulated as an assumption in its GMP proposal, the difference between what it would have cost the contractor to perform the work as stated in its assumption and what it cost the contractor to perform the work as directed (together with the appropriate markups) should be included in a change order that increases the GMP. If the failure on the part of the owner and designer to complete the design in accordance with the assumptions spelled out by the contractor in its GMP proposal results in a delay to the project and all applicable contractual conditions are met, the contractor may be entitled to an extension of the time for performance of the work. The specific facts involved with the change to the assumptions will determine how the responsibility for the delay and the resulting time-related costs are treated. For example, factors such as (1) the timing of when the designer and owner finalized their choices, (2) the availability of the materials needed to implement those choices, (3) the reasonableness of the time allowed in the contractor’s schedule for the work covered by the assumptions, and (4) the reasonableness of the urgency with which the contractor reacted to the owner’s and designer’s choices would all be relevant in analyzing any delays and time-related costs. Thus, the contractor’s entitlement to an increase in the GMP would also extend to the time-related and generalconditions costs associated with the delay. Is the Work in Question Covered by an Allowance? If so, once the actual cost of an allowance item is (or can be) finalized, substitute that actual cost for the original allowance item amount and prepare a change order that adjusts the GMP by the amount of the difference between the actual cost of the allowance item and the original allowance amount (whether that difference is a credit or an add).

Practice Tip Allowances are best used for those aspects of the work that the parties know will be included but simply have not been sufficiently articulated in the plans and specifications to permit the contractor to price the work. Classic examples include things like carpeting or perhaps a water fountain that is only conceptually depicted. Expecting a contractor, no matter how much experience or expertise he or she has, to guess the final

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choices of the owner or designer when such items are finalized is not reasonable. While including an allowance amount in the GMP will hopefully provide the owner with some guidance regarding the cost of the allowance item, the owner retains the risk that the cost associated with these design choices will exceed the allowance amount when an allowance is used. Most allowance clauses are silent regarding the time impacts of choices made with respect to allowance items. The specific facts involved with the definition of the allowance item often determine how timerelated and general conditions are treated. Factors such as (1) the timing of when the designer and owner finalize their choices, (2) the availability of the materials needed to implement those choices, (3) the reasonableness of the time allowed in the contractor’s schedule for the allowance item, and (4) the reasonableness of the urgency with which the contractor reacted to the owner’s and designer’s choices are all relevant in analyzing any time impacts.

Practice Tip With respect to the time allowed in the contractor’s project schedule for the allowance item, note that because the allowance item is included in the GMP, a reasonable amount of time should also be included in the project schedule for that work. In fact, a prudent contractor would include not only a reasonable duration for the work activity, but also time needed to make that decision and a reasonable duration to procure the materials or equipment needed to perform the work once the owner makes its choice. Is the Work in Question Covered by the Contingency? If the contract language is specific enough to articulate the types of work covered by the contingency, that will be helpful in determining whether the work in question is a change or not.

Practice Tip Note that, to the extent that the contingency (and not an exclusion, assumption, or allowance) covers “further development consistent with

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the contract documents and reasonably inferable therefrom,” the risk of the uncertain cost of such work is on the owner up to the amount of the contingency in that the owner must reimburse the cost but that risk is “capped” by the GMP. Once the contingency has been exhausted, the risk of this uncertainty is on the contractor. Accordingly, it is very important to understand that “changes” covered by the contingency are very different in nature from other changes in a GMP contract. That is so because changes covered by the contingency do not result in a change to the GMP. To the contrary, work covered by the contingency is said to be a change “within the GMP” as opposed to a change “to the GMP.” Thus, even though the contingency is one way that “the contractor has provided in the GMP for the further development of such contract documents,” this is where that other clause that is so different from the standard D-B-B contract comes into play. That is, the clause typically states something similar to the following: Owner is relying upon contractor’s representation that it has sufficient experience and expertise with the type of work to be performed for this project to provide owner with a GMP for a complete and functioning facility notwithstanding the fact that the plans and specifications are not 100% complete.

If work covered by the contingency results in delay to the completion of the project, the time-related and general conditions costs associated with those delays may also be reimbursable but subject to the cap established by the GMP. In other words, just as the owner has relied on the contractor’s expertise and experience to include the direct costs associated with the “further development of the contract documents and reasonably inferable therefrom,” so the owner has also relied on the contractor’s expertise and experience to include sufficient time in its schedule to accomplish that work. However, as is the case with assumptions and allowances, specific facts can result in a different outcome: That is, the contractor may be entitled to an extension of the time for performance and an increase in the GMP to cover time-related and general conditions costs under some scenarios. For example, if, through no fault of the contractor, the designer and owner are so late in finalizing their “further development” that it delays the work, or if the materials needed to implement those choices cannot be procured within the time frame reasonably anticipated by the

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contractor, those factors may result in entitlement. Of course, such entitlement would also depend upon a favorable analysis of the reasonableness of the time allowed in the contractor’s schedule for the contingency work and the reasonableness of the urgency with which the contractor reacted to the owner’s and designer’s choices. To summarize, in a typical GMP contract, the contractor acknowledges that (1) the contract documents are incomplete at the time the GMP is set and (2) the GMP includes amounts for the further development of those contract documents. The four basic ways for the contractor to provide for the further development of the contract documents are thus to 1. Exclude the work by including it on its list of exclusions to the GMP, 2. Articulate to the owner an assumption regarding the undefined work that permits the contractor to include an estimate of reasonable costs consistent with that assumption, 3. Include an allowance for the undefined work item in the GMP, or 4. Use its “experience and expertise” to include a sufficient amount in the contingency to cover the cost of such further development. In analyzing changes in the context of a GMP contract, if the change being analyzed can properly be considered “further development consistent with the contract documents and reasonably inferable therefrom” and it is not listed as an exclusion, described in an assumption, or covered by an allowance item, then it should be deemed to be covered by the contingency and subject to the cap set by the GMP.

17.2.3. Scope Changes in a GMP Context Many drafters of GMP contracts have attempted to define “scope changes” in the GMP context; however, no particular iteration has emerged as a standard. The following is an example of one effective way of defining a “scope change” in the GMP context. AIA Document A102 provides, at Section 5.2.5, To the extent that the Drawings and Specifications are anticipated to require further development by the Architect, the Contractor has provided in the Guaranteed Maximum Price for such further development consistent with the Contract Documents

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and reasonably inferable therefrom. Such further development does not include such things as changes in scope, systems, kinds and qualities of materials, all of which, if required, shall be incorporated by Change Order.2

The first sentence refers to the contractor’s acknowledgment that the plans and specifications are incomplete at the time the GMP is agreed to and refers to changes that are needed to complete those plans and specifications as “further development” and that the contractor has provided for the cost associated with that further development in the GMP. The second sentence effectively defines scope changes by listing things that are not to be considered “further development”—things such as “changes in scope, systems, kinds, and qualities of materials,” and notes that such changes must be the subject of a change order that will change the GMP.

17.2.4. Additional Sources of Claims and Disputes under GMP Contracts Several other common features of GMP contracts can—and frequently do—lead to questions of whether a change has occurred. Among these common features are the following: • By the time the negotiations and interchange of ideas between the parties finally home in on the GMP, exhaustive value engineering (VE) discussions have often occurred. • GMP contracts are cost-reimbursement contracts subject to an agreed-upon cap, and disputes and claims sometimes arise concerning what the “cost” of some part of the work actually is and whether a specific cost is reimbursable pursuant to the terms of the contract.

Not surprisingly, therefore, among the specific claims that are often encountered in the GMP context are the following. Open Issues Related to Pre-GMP Value Engineering Proposals Among the possible outcomes relating to any particular VE discussion are

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• Acceptance of the VE suggestion; • Rejection of the VE suggestion; and • Acceptance of the VE suggestion coupled with (1) the complete implementation of that suggestion into the plans and specifications, (2) the dissemination of that information to all the trade contractors, and (3) the confirmation from each of the trade contractors of precisely what the cost impact of that implementation is prior to the final agreement on the GMP between the owner and contractor.

Just reading this list probably suggests the source of claims related to value engineering. The first common VE-related type of problem arises when the parties have not fully documented and agreed upon the outcome of each and every VE proposal. The failure to do so can lead to a complete misunderstanding, with one party believing the VE has been accepted and the other assuming it has been rejected. The ultimate resolution of the issue depends on the available documentation and testimony of involved parties and cannot be generalized.

Practice Tip Parties often mitigate or eliminate this type of misunderstanding by using a VE Log to administer and track all VEs during the entire pre-GMP period. This VE log is then used as an exhibit or attachment to both the GMP agreement and trade subcontracts. Some contractors use a VE log that is electronically available to owner, designer, contractor, and trade contractors throughout the pre-GMP period. Even if such a log is not used, developing a VE proposal list that notes the disposition of each VE proposal and including that as a contract document is still good practice. The second type of VE-related problem arises when a VE suggestion has been accepted (or tentatively accepted) but all of the implications of that acceptance have not been explored or resolved when the owner and contractor agree on the GMP. This type of situation often arises when the VE comes up as a last-minute suggestion as the parties are attempting to close the gap between the GMP the owner wants and the GMP the contractor wants. It can also occur when neither the contractor nor the designer has fully considered the implications that the VE may have on other aspects of the work. For example, if the contractor realizes after the GMP is set that while a particular VE suggestion may lower the price of

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the mechanical trade contractor but result in considerable increases to the electrical and drywall trade contracts, two questions might arise, namely the following: • Should the increases in the electrical and drywall trade contracts lead to an increase in the GMP? • Should the additional cost of the electrical and drywall trade contracts be considered a reimbursable cost and paid out of the contingency?

The answers to these questions vary and depend heavily on analysis of all the facts, circumstances, and contract language, but, in the absence of circumstances or documentation that suggest otherwise, generally the answer to the first question is no, it should not result in an increase in the GMP. The answer to the second question is yes, it should be considered a reimbursable cost and paid out of contingency, up to the cap set by the GMP. Equipment Costs Figuring out the cost that is properly allocable to the use of contractorowned equipment is a challenge in any setting, and GMP contracts are no exception. (See Chapter 11 for a more detailed discussion of equipment costs.) In addition, issues concerning (1) whether the owner should pay for idle equipment or (2) which of the periodic rates should be used (daily, weekly, or monthly) can also lead to disputes.

Practice Tip The parties often anticipate this difficulty and address it in one of the following ways: (1) agree upon rates in advance for contractor-owned equipment that they anticipate will be used, (2) agree to use a set of industry-published rates such as Blue Book rates (or some fraction thereof) for contractor-owned equipment, or (3) require the contractor to provide the owner with proof of the reasonableness of the rates being charged by soliciting competitive quotes from local equipment rental businesses. These issues can become particularly acute if an end-of-job audit is performed and, due to the way the contractor keeps its records or due to

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the use of inflated rates, the contractor appears to have made a substantial profit on its equipment. Under such circumstances, the dispute is often exacerbated because the owner feels that it has been taken advantage of by the contractor and that its trust has been violated. Disputes tinged with that type of emotion are among the toughest to resolve and often can be resolved only by a third party. Employee Costs Employee costs may be a little bit easier to figure out than equipment costs, but not by much. Contributing to the difficulty are variable state and local taxes; variable deductions for fringe benefits, including insurance and Health Savings Account deductions; differences between exempt and nonexempt employees—the list goes on and on. Owners and contractors generally wind up addressing employee costs in one of three ways: 1. Reimbursing actual employee costs as documented in the monthly progress billings; 2. Using an agreed-upon billing rate for purposes of progress billings, but with the understanding that final payment will be adjusted to reflect actual audited employee costs at the end the projects; or 3. Using agreed-upon hourly rates to determine the amount due the contractor for employees. The first two ways seldom result in disputes that cannot be ironed out by the parties. However, one issue that does arise from time to time concerns employee bonuses.

Practice Tip Many contractors have written project-specific employee bonus plans that its employees consider a normal (and necessary) part of their overall compensation package. But many owners balk at the idea of reimbursing a contractor for bonuses. However, if the contractor can explain the likely payout under the plan and include that amount in its GMP pricing and the bonus plan (1) results in reasonable payments, (2) is based on criteria that are consistent with the owner’s interests (i.e., timely completion of a quality project reasonably within budget), and (3) is a part of the

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contractor’s standard compensation package for its employees, the owner might consider such payments reasonable. Of course, the easiest way to avoid a dispute over bonuses is to discuss them and resolve the question as a part of the GMP negotiations. The third format—using agreed-upon hourly rates to determine the amount due to the contractor for employees—is probably the most problematic of these alternative ways of handling employee costs. This is so for various reasons, including • Lack of clarity in the rates. That is, if the rates are set by worker classification (such as “project engineer” or “assistant superintendent”), the parties may differ on who gets paid at which rate. Or, a rate may not exist to cover an apprentice, an intern, or a part-time employee. • The rate schedule may not distinguish between employees who are paid overtime and those who are not paid overtime. For example, if a superintendent works 50 hours but, as a salaried employee, is paid no more than when he or she works 40 hours and the contractor bills the owner for 50 hours at the agreed-upon rate, owners often reject that billing, and a dispute ensues. • By exercising its audit rights or otherwise, the owner may discover (or have reason to suspect) that the rates agreed to result in considerable profit enhancement for the contractor. When this happens, the owner will commonly claim that (1) it was misled into agreeing to those rates or (2) the contractor failed to meet an implied obligation to disclose the profit margin contained in those rates.

The parties must recognize that, to the extent the contractor has included profit in the agreed-upon employee rates, a conflict of interest is created that is inconsistent with the trust relationship inherent in the context of a GMP contract. That is, the owner rightly expects the contractor to keep employee costs to a minimum, but the profit in the rates effectively incentivizes the contractor to drive employee usage higher. It should surprise no one that this can lead to problems. Under such circumstances, as noted in the previous conclusion of discussion of equipment costs, the owner’s feeling that it has been taken advantage of by the contractor and that its trust has been violated often exacerbates the resultant dispute. Disputes tinged with that type of emotion are among the toughest to resolve and often can be resolved only by a third party.

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Practice Tip The experiences of the authors are that the best practice is the second option—namely the use of an agreed-upon billing rate for purposes of progress billings only, with the understanding that final payment will be adjusted to reflect actual audited employee costs at the end the project. Costs Related to Self-Performed Work Ordinarily, the parties will agree to permit the contractor to self-perform work only after qualified subcontractors bid upon the work and the contractor agrees to perform the work for a lower lump-sum price than the low subcontract bidder. In this way, the owner is assured that it is receiving competitive pricing for that work. However, even when this safeguard is used, self-performed work by a GMP contractor can still create the potential for disputes. The issue to be dealt with when a GMP contractor self-performs a portion of the work is how to properly segregate the costs related to general conditions from those that are related to the self-performed work. The reason this is an issue is that if the contractor is paid for the general conditions on a cost-reimbursable basis, but the basis of payment for the self-performed work is lump sum, a potential conflict of interest or double-dipping of general conditions may exist. That is, to the extent the contractor can manage and complete its self-performed lump-sum work using cost-reimbursable general conditions persons or equipment, the contractor may be able to increase the profit realized on the lump sum work. Owners that suspect that this is occurring typically raise claims and disputes with respect to this issue. Resolution of the dispute will require access to the contractor’s bid for the self-performed work and an analysis of all the relevant daily cost records.

Practice Tip If self-performed work will take place on the GMP project, the contractor is recommended to keep separate cost records for the self-performed work and to give the owner contemporaneous access to those separate cost accounts. In other words, costs and employee timesheets need to be coded as they are incurred, with copies of those coded cost reports

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provided to the owner on a daily basis. Such transparency can help ensure that abuses will not take place. Reimbursability Issues and Use of Contingency Most GMP contracts contain a fair amount of description of the types of costs that are reimbursable as both the cost of the work and as general conditions. When things go well, these descriptions provide sufficient guidance to enable the parties to avoid disputes. However, when things go badly, the parties seem capable of finding plenty of reimbursability issues. Such issues can involve costs incurred to correct subcontractor errors or to perform punchlist work, the cost of the lunches brought in for job meetings or the hats with the project name on them that were part of team-building efforts, the costs of employee vacation time, costs related to pickup trucks and other vehicles that are used primarily as personal means of transportation for employees assigned to the project, claim preparation costs, and the list can go on and on. Of course, the first place to look when analyzing these costs is the contract itself. The second place to look is the “conduct of the parties” as the work proceeded. It has long been an adage that “the conduct of the parties lends meaning to the terms of the contract.” And what this means is that a natural tendency exists on the part of third-party dispute resolvers (judges, arbitrators, etc.) to give considerable weight to the conduct of the parties when attempting to discern the “intention” behind specific contract provisions. In other words, if, as the work proceeded, the contractor billed the owner for those morale-boosting lunches and hats and those pickup trucks and cars that were used almost exclusively for personal use, and the owner paid what was invoiced, then it appears that the parties thought that the words in the contract called for the reimbursement of those costs. Otherwise, the contractor would not have billed those costs and the owner would not have reimbursed those costs. Is this always dispositive? No. Should both owner and contractor take considerable care in the preparation and processing of the monthly invoices lest they inadvertently establish a precedent that they will later regret? Yes.

Practice Tip Owners who have traditionally administered only lump-sum contracts are sometimes a bit overwhelmed by cost-based billing. When, instead

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of getting the simple estimate of percentage complete type of billing, they receive a banker’s box filled with invoices for everything from port-a-johns to copy machines, subcontract billings, labor cost reports, and the like, their confusion is understandable. However, even if the contract contains language to the effect that payment of any invoice will not be considered a waiver of any right or an alteration of the contract terms and conditions, the owner bears the burden of carefully reviewing those billings and taking care not to “lend meaning to the contract.” The Administration and Use of Contingency A contingency, like a schedule, is not a static thing. It changes as events unfurl, subcontracts and purchase orders are signed, and costs are incurred. Accordingly, just as a schedule needs to be updated when the work on the project progresses, the current contingency balance needs to be continually tracked and monitored. Contractors who are experienced with GMP contracts do this as a part of the monthly billing process.

Practice Tip Some contractors accomplish this tracking by creating and maintaining what they call a “commitment report.” This report is based on the original GMP breakdown and tracks “commitments” (i.e., subcontracts, purchase orders, material contracts) as they are executed. When those commitments cover the entire scope of a line item, the difference between that commitment and the amount shown in the original GMP breakdown is noted as an overrun or underrun on that line item, and that amount is either added to (if it is an underrun) or subtracted from (if it is an overrun) the contingency balance. Then, other costs that have been incurred, billed, and paid against the contingency are taken into account, and the current contingency balance is calculated and shown. In this way, both the owner and contractor can know the current status of the contingency throughout the course of the project. If this type of tracking is not done, both owner and contractor may lose track of the contingency balance. When this happens, one of two things becomes more likely to occur: (1) contractor billings against the

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contingency are disallowed because of an inaccurate assumption that the entire contingency has been used or (2) the contractor is reimbursed for costs that wind up exceeding the contingency balance. In either event, when the parties finally get around to doing a complete reconciliation and an attempt is made to retroactively adjust the accounting, conditions are ripe for disputes.

Practice Tip Some owners have been known to argue that (1) any overrun that the contractor encounters in buying out the line items of the GMP should come out of the contractor’s fee and (b) any underrun on a line item of the GMP should inure entirely to the benefit of the owner and not flow into the contingency. However, this logic is flawed. If that happened, the contractor would effectively be bound to a GMP on each and every line item that makes up the overall GMP, and that is simply not how a GMP is supposed to work.

An Auditor Who Understands Generally Accepted Accounting Principles but Does Not Understand GMP As should be somewhat clear from the previous discussion, the work of determining what is properly payable under the terms of a GMP contract requires an understanding of what a GMP is and how it works. Accordingly, it takes more than just a working knowledge of generally accepted accounting principles (GAAP). Yet, more than one dispute has been created when an owner hires an accountant who does not have experience with the nuances of GMP contracting. Shared Savings What happens when change orders have increased or decreased the GMP? Does that affect how shared savings are calculated? Some owners try to claim that savings should be measured only against the original GMP amount. While the outcome of such a dispute may be controlled by specific contract language, in the absence of language requiring a different result, the “savings” should be measured against the adjusted GMP amount.

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17.3. Changes in the Context of a Design-Build Contract Design-build contracts are so fundamentally different from the traditional design-bid-build format that the analyst must take a revised approach to his or her analysis when attempting to determine whether and to what extent something is a change in the context of a design-build contract. The following sections describe some of the differences in such an analysis.

17.3.1. Use of the GMP Format Many design-build contracts use the GMP format. That format is, of course, altered to (1) shift design responsibility to the contractor and (2) address the fact that, typically, the documents describing the project need a lot more “further development” than one sees in the non-designbuild GMP context. Nevertheless, if a GMP format is used, the GMP design-build proposal is likely to include (1) exclusions, (2) assumptions, (3) allowance items, and (4) a contingency. If that is the case, then the discussion in Section 17.2 will also be helpful to anyone seeking to resolve issues relating to alleged “changes” that can be properly characterized as related to the completion of the incomplete plans and specifications that existed when the parties agreed to the GMP.

17.3.2. A Different Baseline for Measuring Changes As noted in Section 17.2, when the plans and specifications are less than 100% complete at the time an agreement is entered into and a price to perform the project is established, the baseline used to measure changes will differ from the traditional standard. That is, in D-B-B projects, what is shown on the plans and described in the specifications is the baseline against which alleged changes are measured, whereas in many designbuild projects, the plans and specifications are so much less than 100% complete at contract execution that they do not provide a complete or accurate baseline against which to measure alleged changes. So what baseline is to be used? The analyst needs the correct approach to answer this question regardless of whether the basis for payment is a GMP or an agreed-upon lump sum. In both cases, knowing

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not only whether a scope change exists, but also how to measure the extent of that scope change, is important. However, a single, universally applicable answer to this question does not seem to exist. This is so for various reasons, among which are the following: (1) the general circumstances and status of completion of the preliminary design can vary so widely and (2) even if the parties start out with a “standard” agreement, the terms and conditions of designbuild contracts are frequently negotiated by the parties as part of the procurement process. Nevertheless, these terms and conditions carry a lot of weight in answering the question of whether or not a scope change has occurred. Accordingly, those terms and conditions are the first place to look when attempting to determine the baseline for measuring changes. If, however, those terms and conditions leave the question open to any degree, the discussion that follows is intended to provide a list of some other good places to look for the answer(s) to this question.

17.3.3. The RFP and Project Requirements The owner typically uses the request for proposal (RFP) to describe the project. The intent and purpose of the RFP is to describe to the proposers what the owner is procuring. And that description should provide much of the baseline against which alleged changes should be measured. But here, again, the lack of a single, standard format for RFPs in the design-build context makes it difficult to generalize what to look for. However, among the things that an RFP might include that will be useful in helping to establish that baseline are the following: • A preliminary design—usually depicted in a set of conceptual drawings and a partial or outline set of specifications; • A list of design standards that the completed design must meet; • Requirements specifying the owner’s needs with respect to the reliability, availability, maintainability, and inspectability (sometimes referred to as a RAMI plan) of major mechanical and electrical systems and equipment; • Project requirements—often a written narrative or description of what the owner wants and needs that attempts to describe in words what the completed project will be and the time frame for the completion of the work;

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• Requirements or specifications (prescriptive or performance) related to specific pieces of equipment or isolated aspects of the overall project; • Project duration and milestone dates for specific aspects of the work; • A geotechnical report; • Permitting requirements; and • Security or other site-access requirements.

Some design-build projects have a much more extensive list of baseline requirements set forth in the RFP, while other projects have a far shorter list. Whatever the case, the RFP will include the bulk of the specifics related to the baseline.

17.3.4. Design-Build Proposal The design-build proposal is the design-builder’s response to the owner’s RFP. The design-builder’s proposal commonly is made part of the contract documents, though it is often incorporated subject to limitations that are articulated during the selection process. Accordingly, but subject to those qualifications, the proposal also helps to define the baseline against which alleged changes should be measured. At the absolute minimum, it can be helpful in determining what the proposer’s understanding of the project was at the time of the procurement. Procurement processes also vary widely in the design-build context. Some forbid one-on-one discussions and mandate that interpretation or variation of any of the project requirements take place only by means of a written addendum issued to all proposers. In other procurements, creativity is encouraged and work sessions designed to facilitate that creativity are common. This latter approach can result in understandings that may do more than just “flesh out” the RFP: some of those understandings may actually alter some of what is stated in the RFP. When this happens, the importance of the proposal in establishing the baseline is greater.

17.3.5. Common Sources of Disputes and Claims on Design-Build Projects If the project uses a GMP format, then the sources of disputes and claims listed in Section 17.2 are just as likely to occur on a design-build project.

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The following sections include some issues that are unique to designbuild work, regardless of whether it is performed on a GMP or lumpsum basis. Prescriptive Specifications or Performance Specifications Specifications included in the project requirements can be either performance-based (sometimes referred to as “open” specifications) or prescriptive (sometimes referred to as “closed” or “method” specifications). In addition, proprietary specifications are considered to be the most closed type of prescriptive specifications. Performance specifications transfer the maximum design responsibility to the design-builder in that they focus on the end result (and the means of verifying that end result). Recognized benefits of performance specifications are that they (1) allow considerable flexibility to the design-builder to determine how to meet the performance requirement needed by the owner and (2) encourage creativity in developing the means to meet those needs. Conversely, a prescriptive specification is often characterized by detailed descriptions of material and workmanship requirements, and a proprietary specification typically designates a specific product or model number. Both prescriptive and proprietary specifications result in the owner retaining significant responsibility in the event the detailed description of materials and workmanship or the designated product fails to meet the owner’s needs. In fact, most specification packages—intentionally or unintentionally —actually contain a mix of these specification types. In some industrial projects and many power projects, owners often intentionally include a “mixed bag” of specification types in the EPC contracts that are often used for those projects. Under these contracts, major components of the project typically are either the subject of proprietary specifications or preprocured by the owner under contracts that are subsequently assigned to the contractor, while most of the mechanical, electrical, and instrumentation and control systems that interconnect those components and the facilities and structures that house the equipment are to be designed (engineered) and built by the contractor. One source of disputes involves determining what type of specification controls the work in question. That is, on occasion, the specifications themselves are unclear or actually contain contradictory language. This

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lack of clarity or contradictory language then results in disputes over whether the work in question was intended to be the subject of a prescriptive or a performance specification. Two additional disputes commonly arise with respect to this subject. That is, even when something is clearly designated as being the subject of a performance specification, disputes can arise concerning (1) the criteria to be used to determine whether the specified performance has been met or (2) the methods to be used to verify that those criteria are being—or have been—met. The analysis of these disputes requires an intense focus on not only what the contract documents say with respect to the issue but also on the contemporaneous project documentation created by the parties and the conduct of the parties as they dealt with the issue. Referenced Standards and Which Standards Apply to What Disputes involving design standards often seem to start with a complaint from the design-builder that the contract documents incorporated by reference a spectrum of design standards but did not specify which standard applied to which parts of the work. Although confusion over exactly which standard may be applicable is a factor in some disputes, including a spectrum of standards can be a reasonable practice when considering that the design-builder is ultimately responsible for the design and determining which standard is applicable may not reasonably be possible until the design-builder makes certain design choices. In fact, including that spectrum of standards provides the design-builder with flexibility in making those choices, and such flexibility allows for the innovation and creativity that is often a goal of the design-build process itself.

Practice Tip Disputes over which standard applies to a specific aspect of the work commonly surface during the submittal process. Unfortunately, the submittal process may not be the most efficient or practical forum for the resolution of such issues. This is so because (1) issues often spend quite a bit of time getting knocked around in the submittal process before coming to the attention of senior managers on the project and (2) by the time submittals are made, the time left for the resolution of such issues is

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quite often somewhat short. This means that the consequences of resolving the issue often include allegations of delay, which almost always makes the resolution of the issue more difficult. Project-specific designer and reviewer training programs that include training modules that sensitize the reviewers to potential problem areas like this are helpful in preventing these types of issues—or at least bringing them to the attention of senior managers sooner. Also, as noted in the following, a requirement in the design phase quality assurance/ quality control (QA/QC) plan that applicable standards be identified in submittals can help identify such issues early and thereby mitigate the impact of the issue, regardless of how it gets resolved. Quality Assurance/Quality Control Owners can reap many benefits from the design-build process. However, one of the “costs” of the design-build process is that the owner must relinquish some of the control over design it has under the traditional D-B-B formats. Under those traditional formats where the designer is under a direct contract with the owner, the designer is typically quite happy to draw and specify whatever the owner wants, in part because as long as the design is proper from an engineering perspective, the designer can do so without adverse financial impact. This dynamic is different in the design-build process, where the designer is part of the design-builder’s team. As such, the two major differences that designers encounter are (1) that the designer now works at the builder’s direction, not the owner’s, and (2) the designer must be much more sensitive to the cost implications of design changes. For example, in the traditional D-B-B setting, the designer tends to be an advocate for the owner, often insisting, in instances where more than one reasonable interpretation of the plans and specifications may exist, on the interpretation that yields the highest quality. In contrast, the designbuilder’s focus is, in most cases, on constructing a cost-effective project over constructing the highest quality project. In most cases, the reason that the designer works at the direction of and plays a secondary role to the builder as part of the design-build team is that the builder is the entity with the financial backing, wherewithal, and bonding capacity necessary to bid on the project. Additionally, the designer’s contractual role of design-builder tends to heighten his or her awareness that even seemingly minor changes in the drawings and specifications can have significant financial impact on the design-builder.

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A well-conceived and well-drafted QA/QC plan that addresses not only the procurement and construction processes but also the design process allows the owner to maintain an appropriate level of control over the design even in the design-build context. For this reason, being conscientious and thorough in the development, articulation, and administration of the QA/QC plan in the design-build context is important. Much has been written about QA/QC plans, and an Internet search would doubtlessly turn up many different checklists that one might refer to in developing QA/QC plans. And, it seems obvious that the level of detail to be included in a QA/QC plan on a design-build project might reasonably vary, depending on whether the project is for the construction of a research laboratory in which nuclear materials will be used or a backyard swimming pool. But, whether drafting the QA/QC plan or considering its impact on claims or changes on a design-build project, some questions to explore include the following: 1. Does the design phase QA/QC plan a. Articulate how the owner will assure itself that the designbuilder is meeting its intent?

Practice Tip Among the surest ways to create claims on a design-build project is for either the owner or the design-builder to ignore the RFP and project requirements (that is, the baseline) in its submittals and in the comments on those submittals. When this occurs and is allowed to continue, it seldom ends well for any of the stakeholders. This is another area in which a project-specific training program can be helpful. The design-build team should be sensitized to the need to reference the RFP and project requirements when it makes design choices. And, the owner’s review team will benefit from training that emphasizes to the importance of focusing on the RFP and project requirements when making comments. Training modules that give real examples of “good comments” (those that make specific reference to the baseline to be followed) and “bad comments” (those that focus on “how we’ve always done it when we did the design ourselves” or “what we think we need” or “what we prefer”) can help resolve issues in a proper and timely manner and mitigate claims.

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b. Establish criteria for determining whether the design phase deliverables (that is, the plans and specifications) are of the appropriate quality?

Practice Tip Efforts made during the design phase to make sure that the design documents address the requirements of the procurement phase QA/QC plan and construction phase QA/QC plan mentioned above can go a long way toward establishing whether deliverables are of appropriate quality. 2. Does the procurement phase QA/QC plan a. Establish the means of ensuring that the proper specifications for materials and equipment are included in the plans and specifications? b. Ensure that the manufacturing process needed to meet the specifications is identified and adequately described? c. Address the criteria and standards relating to transportation and handling of materials needed to ensure that the quality of that material is not compromised? 3. Does the construction phase QA/QC plan a. Establish criteria for selecting subcontractors and suppliers? b. Establish the criteria needed to ensure that construction is performed in accordance with contract standards? c. Identify when and how inspections will take place? d. Identify the testing that will be performed? e. Address the procedures for handling nonconforming work? f. Describe how requests for information, change order requests, claims, and punchlists will be administered?

17.4. Conclusion To summarize, the circumstances present when design-build agreements are executed can vary even more widely than the terms and conditions of design-build agreements themselves. All these variations can affect the analysis of changes. Accordingly, setting forth a single, standard,

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definitive road map to guide the analyst may not be possible. Nevertheless, when analyzing changes in the design-build context, it is crucial to identify and use the correct baseline against which potential changes should be measured. To do so requires not only an understanding of the terms and conditions of the specific procurement but also an analysis of the documents and circumstances upon which the design-builder based its proposal. Among the places to look for this baseline are the RFP and project requirements, which typically include a preliminary design, a set of design standards, and numerous other relevant documents. Although the extent to which the design-build proposal establishes the baseline may be subject to terms and conditions that limit its usefulness in this regard, it can also provide guidance when searching for the proper baseline. The specifications contained in the RFP and project requirements should be analyzed to determine whether they are prescriptive specifications or performance specifications, and the project record should be reviewed to determine whether the parties have dealt with them accordingly. Regardless of whether the QA/QC plan was part of the RFP or project requirements, or project deliverables, it can also provide guidance to an analyst searching for the correct baseline.

Endnotes 1. AIA A102 2007 Form of Agreement Between Owner and Contractor Where the Basis of Payment Is the Cost of the Work Plus a Fee with a Negotiated Guaranteed Maximum Price. 2. Ibid.

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Case Law Index

Ace Constructors, Inc. v. United States, 70 Fed. Cl. 253 (Fed. Cir. Mar. 31, 2006), aff’d, 499 F.3d 1357 (Fed. Cir. Sept. 19, 2007), 317n68 American Dredging Co. v. U.S., 207 Ct. Cl. 1010, 1012 (Ct. Cl. 1977), 108 American Structures, Inc. & Mining Equipment Manufacturing Cooperation, ENGBCA 3408 75-1 BCA ¶11,283, 88n20 Appeal of A. Teichert & Son., Inc, 144 Appeal of Atlas Construction Co., Inc. GSBCA Nos. 7903, 8143, and 8593, 90-2, (1990), 240n19 Appeal of Batteast Construction Co., Inc., ASBCA No. 35818 (Dec. 31, 1991), 214, 315n21 Appeal of Bay Construction Co. VABCA no. 5594, 02-1 BCA (2002)WL 442118, 214 Appeal of Bay West, ASBCA No. 54166, April 25, 2007, 215, 239n15 Appeal of Bruce-Anderson Co., Inc., ASBCA No. 29411 (Aug. 1, 1988), 115n79 Appeal of Centex Construction Co., Inc., ASBCA No. 29323 (Sept. 30, 1985), 113n60 Appeal of Eichleay Corp., ASBCA No. 5183, 60-2 BCA ¶ 2688, 1960 WL 538 (July 29,1960), adhered to on reconsid., 61-1 BCA ¶ 2894, 1960 WL 684 (Dec. 27, 1960), 301 Appeal of Fort Mechanical, Inc., GSBCA No. 6350 (July 18, 1983), 111–112n20 Appeal of George Hyman Constr. Co., ENGBCA No. 4541, 85-1 BCA ¶17847,

1985 WL 16440 (Jan. 10, 1985), 287– 288, 315n18 Appeal of Peterson Construction Co., Inc., ASBCA No. 44197 (Nov. 12, 1992), 90n37 Appeal of P.J. Dick Inc., VABCA Nos. 5597, 5836-5837, 5839-5850, 5951-5965 and 6017-6024, 01-2 BCA ¶ 31,647 (Sep. 27, 2001), 239n14 Appeal of Questar Printing, Inc., GPOBCA No. 19-94, 397n6 Appeal of R.W. Contracting Inc., ASBCA No. 24627 (1984), 314n11 Appeal of Western Alaska Contr., ASBCA No. 46033 (Dec. 30, 1994), 291 Arcon Constr. Co., Inc., v. South Dakota Cement Plant, 349 N.W.2d 407 (S.D. 1984), 295–296 Atlantic Dry Dock Corp. v. United States, 773 F. Supp. 335, 338-39 (M.D. Fla. 1991), 345n43 Awad v. United States, 301 F.3d 1367, 1373 (Fed. Cir. 2002), 63n56 Aydin Corp. v. Widnall, 61 F.3d 1571, 1577 (Fed. Cir. 1995), 61n10 Baldi Bros. Constructors v. United States, 50 Fed. Cl. 74 (Ct. Cl. 2001), 318n84 Banks Bldg. Co., LLC v. Malanga Family Real Estate Holding, LLC, 102 Conn. App. 231, 240-41 (2007), 397n13 Bateson-Stolte, Inc. v. U.S., 145 Ct. Cl. 387, 172 F. Supp. 454 (1959), 114n72 Bateson-Stolte, Inc. v. U.S., 305 F.2d 386 (Ct.Cl. 1962), 89–90n34 Beacon Constr. Co. v. U.S., 161 Ct. Cl. 1, 314 F.2d 501, 504 (Ct. Cl. 1963), 104

459

460

Case Law Index

Bechtel National, Inc., NASA Board of Contract Appeals No. 1186-7, 90-3 BCA ¶ 22,549, 113,177 December 22, 1989, 240n19 Bell BCI Co. v. United States, 72 Fed. CL. 164, 168 (2006), 214, 215 Blake Constr. Co., Inc., ASBCA No. 39937, 90-3 BCA ¶23,196, 152n7 Brooks v. Bankson, 248 Va. 197, 208, 445 S. E.2d 473, 479 (1994), 136n15 Bruce Constr. Co. v. United States, 324 F.2d 516, 520 (Ct. Cl. 1963), 267 C. Norman Peterson Co. v. Container Corp. of America, 218 Cal. Rptr. 592 (Ct. App. 1985), 319n88 Carman v. U.S., 143 Ct. Cl. 747 (1958), 89–90n34 Centex Bateson Constr. Co., VABCA Nos. 4613, 5162–565, 99–1 BCA¶ 30,153, 238n5 Chapman-Martin Excavating & Grading, Inc. v. Hinkle Contr. Co., LLC, 2011 U. S. Dist. LEXIS 138226 (S.D. W. Va. 2011), 257n29 Charles T. Parker Constr. Co. v. U.S., 433 F.2d 771 (Ct.Cl. 1970), 89n30 CJP Contractors, Inc. v. U.S., 45 Fed. Cl. 343 (1999), 397n20 Clark Concrete Contractors, Inc. v. General Services Administration, GSBCA No. 14340, 99-1 BCA (CCH) ¶30,280 (1999), 214, 216 Colorado River Materials, Inc., ASBCA No. 57751, BCA ¶35233, 2013 WL 603641 (Feb. 4, 2013), 345n44 Corban Industries, Inc., v. United States, 24 Cl. Ct. 284 (1991), 315n12 Daewoo Engineering and Construction Co., Ltd. v. United States, 73 Fed. Cl. 547 (2006), 213, 385n48 Danac, Inc., ASBCA 33394, 97-2 BCA ¶ 29184, 223–224 Danzig v. AEC Corp., 224 F.3d 1333 (Fed. Cir. 2000), 396n4 D.C. v. Kora & Williams Corp., 743 A.2d 682, 698 (D.C. 1999), 397n20 D.C. v. Org. for Envtl. Growth, Inc., 700 A.2d 185, 199 (D.C. 1997), 398n36

Delcon Construction v. U.S., 27 Fed. Cl. 634 (1993), 83 Donald R. Stewart & Associates, No. AGBCA 89-222-1, 92-1 BCA ¶24,705, 152n3 E. C. Ernst, Inc. v. Koppers Company, 476 F. Supp. 729 (W.D. Pa. 1979), 214 Empire Energy Mgmt. Sys., Inc. v. Roche, 362 F.3d 1343, 1354 (Fed. Cir. 2004), 396n4 Excavation Constr., Inc., ENGBCA No. 3858, 82-1 BCA (CCH) ¶ 15770 (1982), 319n95 Facebook, Inc. v. Pacific Nw. Software, Inc., 640 F.3d 1034 (9th Cir. 2011), 345n41 Farnsworth & Chambers Co., Inc. v. U.S., 171 Ct.Cl. 30 (1965), 89n28 Federico Co. v. New Bedford Redevelopment Auth., 723 F.2d 122 (1st Cir. 1983), 87n3 Fehlhaber Corp. v. U.S., 138 Ct. Cl. 571, 584, 151 F. Supp. 817 (Cl. Ct. 1957), 115n96 Fidelity Constr. Co., DOT CAB No. 1113, 81-2 BCA (CCH) ¶ 15345 (1981), 319n95 Fireman’s Fund Ins. Co. v. United States, 92 Fed. Cl. 598 (2010), 61n8, 136n12 Flippin Materials Co. v. U.S., 160 Ct.Cl. 357 (1963), 90n42 Fortec Constructors, Inc. v. United States, 8 C1. Ct. 490, 506 (1985), 130 Foster Const. C.A. & Williams Bros. Co. v. U.S., 435 F.2d 873 (Ct.Cl. 1970), 88n18 Fraser Construction Co. v. United States, 384 F.3d 1354, 1361 (Fed. Cir. 2004), 136n17 Fru-Con Constr. Corp. v. United States, 43 Fed. Cl. 306, 324–25 (1999), 62n18 Gaston & Associates v. U.S., 27 Fed Cl. 243 (Fed. Cl. 1992), 105–106 Gen. Contracting & Constr. Co, Inc. v. U.S., 84 Ct. Cl. 570, 579 (1937), 113n69 Giesler v. U.S., 232 F.3d 864, 877 (Fed. Cir. 2000), 114n74 Gordon H. Ball, Inc. ENGBCA No. 3563, 78-1 BCA, 82–83

Case Law Index

Granite Constr. Co. v. U.S., 962 F.2d 998 (Fed. Cir. 1992), 109, 112–113n47, 113n64 Green Construction Co. v. Kansas Power & Light Co., 1 F.3d 1005 (10th Cir. 1993), 88n20 Hallman v. U.S., 80 F.Supp. 370 (Ct.Cl. 1948), 89n32 Hardeman-Monier-Hutcherson v. U.S., 198 Ct.Cl. 472 (1972), 89n34 Helene Curtis Industries, Inc. v. U.S., 160 Ct. Cl. 437 (1963), 102, 114n70 Hensel Phelps Construction Co. v. General Services Administration, GSBCA No. 14744, 01-1 BCA ¶ 31,249 (Jan. 11, 2001), 240n18 Hills Materials Co. v. Rice, 982 F.2d 514 (Fed. Cir. 1992), 111–112n20 H.L. Smith, Inc. v. Dalton, 49 F.3d 1563, 1564 (Fed. Cir. 1995), 62n16 H.N. Bailey & Assoc. v. U.S., 449 F.2d 376, 196 Ct. Cl. 166, 177 (Ct. Cl. 1971), 114n74 Hogan Family Enters. v. Town of Rye, 951 A.2d 159, 163 (N.H. 2008), 345n41 Hol-Gar Mfg. Corp. v. U.S., 351 F.2d 972, 169 Ct. Cl. 384, 390 (Ct. Cl. 1965), 94–95 Hydrospace Electronics & Instrument Corp., ASBCA 17922, 74-2 BCA ¶10682, 109–110 In Re Standard Coating Serv., Inc., ASBCA No. 48611, 00-1 B.C.A, 398n23 J.A. Jones v. U.S., E.N.G.B.C. A. Nos. 6348, 6386–91, 00–2 B.C.A. ¶ 31,000, 213– 216 James Corporation v. North Allegheny School District, No. 1268 C.D. 2007, 214, 215 Jansen v. U.S., 34 F.2d 363, 170 Ct. Cl. 346, 354 (1965), 112n47 Jefferson Const. Co. v. U.S., 183 Ct.Cl. 720 (1968), 87n7 John Doyle Construction Ltd v Laing Management (Scotland) Ltd [2004] BLR 295, 240–241n19

461

Laburnum Construction Corp. v. U.S., 325 F.2d 451, 163 Ct. Cl. 339, 350 (Ct. Cl. 1963), 103 Lakeview Constr. Co. v. United States, 21 Cl. Ct. 269, 277–78 (1990), 65n113 Leal v. U.S., 149 Ct.Cl. 451 (1960), 89n31 Lee v. Smith Barney, Harris Upham & Co., Inc., 626 So. 2d 969 (Fla. Dist. Ct. App. 2d Dist. 1993), 344n15 Lenry, Inc. v. U.S., 156 Ct.Cl. 46 (1962), 89n34 Libertatia Associates, Inc. v. U.S., 46 Fed. Cl. 702 (2000), 398n25 Lovering-Johnson, Inc., ASBCA No. 53902, 05-2 BCA ¶ 33,126, 136n18 Luria Bothers & Co. v. United States, 369 F2d. 701 (Ct. Cl. 1966), 213, 215, 216 L.W. Foster Sportswear Co. v. U.S, 97 Madden Phillips Const., Inc. v. GGAT Dev. Corp., 315 S. W.3d 800 (Tenn. Ct. App. 2009), 397n13 Maitland Bros. Co., ASBCA 86-2 B.C.A. (CCH) ¶18,796, 64n93 Martin Const., Inc. v. U.S., 102 Fed.Cl. 562 (2011), 397n20 Maxwell Dynamometer Co. v. U.S., 181 Ct. Cl. 607, 386 F.2d 855 (Ct. Cl. 1967), 97–98 McKie v. Huntley, 620 N. W.2d 599 (S.D. 2000), 318n84, 319n87 Mergentime Corp. v. Washington Metro. Area Transp. Auth., No. Civ. 89-1055 TFH, 2006 WL 416177 (D.D.C., Feb. 22, 2006), 397n22 Metcalf Construction. Co., Inc. v. United States, 742 F.3d 984 (Fed. Cir. 2014), 135n2 Metropolitan Sewerage Commission v. R.W. Construction, Inc., 241 N.W 2d 371, (1976), 90n51 Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 724-26 (4th Cir. 2000), 256n2, 257n15 Morganti National, Inc. v. United States, 49 Fed. Cl. 110 (2001), 396n1 Morrison-Knudsen Co. v. U.S., 397 F.2d 825 (Ct.Cl. 1968), 88n19 Morse Diesel Int’l v. United States, 74 Fed. Cl. 601, 625-34 (2007), 343n7

462

Case Law Index

Mountain Home Contractors, 105–106, 115n90 NDG Constructors, ASBCA No. 57328, 12-2 BCA ¶ 35,138, 88n18 Neal & Co. vs. U.S., 19 Cl. Ct. 463 (1990), 100 Newport News Shipbuilding & Dry Dock Co. v. Garrett, 6 F.3d 1547, 1553 (Fed. Cir. 1993), 63n38 Nicon, Inc. v. United States, 331 F.3d 878 (June 10, 2003), 318n74 Norair Eng’g Corp. v. United States, 666 F. 2d 546 (Ct. Cl. 1981), 143–144 OBS Co., Inc. v. Pace Const. Corp., 558 So.2d 404 (Fla. 1990), 256n14 Olin Jones Sand Co. v. United States, 225 Ct. Cl. 741 (1980), 319n98 P. T. & L. Construction Co. v. State of New Jersey, Department of Transportation, 5-31 A.2d 1330 (N.J. 1987), 89n26 Pennsylvania Department of Transportation v. Herbert R. Imbt, Inc., 630 A.2d 550 (Pa. Commw. Ct. 1993), 291–292 Perini Corp. v. U.S., 180 Ct.Cl. 768 (1967), 89n31 P.J. Dick Inc. v. Principi, 324 F.3d 1364, 1370 (Fed. Cir. 2003), 214, 215 Praecomm, Inc. v. United States, 78 Fed. Cl. 5, 12 (Fed. Cl. 2007) aff’d, 296 F. App’x 929 (Fed. Cir. 2008), 398n36 Prunty Constr., Inc. v. City of Canistota, 2004 SD 78, 682 N.W.2d 749 (2004), 315n13 P.W. Construction, Inc. v. U.S., 53 Fed. Appx. 555 (Fed. Cir. 2002), 214 Ragonese v. U.S., 128 Ct. Cl. 156, 120 F. Supp. 768 (1954), 114n72 Ray D. Bolander v. U.S., 186 Ct.Cl. 398 (1968), 87n5 Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1583 (Fed. Cir. 1995), 62n17 Reliance Ins. Co. v. County of Monroe, 604 N.Y.S.2d 439 (1993), 87n2 Rhode Island v. SJV Electric Inc., PB No. 01-1932, at 15 (R.I. 2008), 397n21

Ryco Construction, Inc., v. United States, 55 Fed. Cl. 184 (Ct. Cl. 2002), 314n7, 318n83 Saddler v. U.S., 287 F.2d 411, 15 Ct. Cl. 557, 561 (Ct. Cl. 1961), 113n69 SAE/Americon-Mid Atlantic, Inc., GSBCA Nos. 12,294 et al., 98-2 BCA ¶ 30,084, 135n9 Sauer, Inc. v. Danzig, 224 F.3d 1340, 1348 (Fed. Cir. 2000), 238n11 Sauer Inc., v. U.S., U.S. Fed Circuit Court of Appeals, 99-1206, 238n10 S.C. Anderson, Inc. v. Bank of America, 24 Cal.App.4th 529 (5th Dist. 1994), 319n98 Scarborough v. Principi, 541 U.S. 401, 405 (2004), 64n94 Schmidt Bros. Construction Co. v. Raymond Y.M.C.A. of Charles City (Iowa 1917) 163 N.W. 458, 462, 408n3 Security National Bank v. U.S., 184 Ct.Cl. 741 (1968), 89–90n34 Servidone Construction Corp. v. United States, 931 F.2d 860 (Fed.Cir. 1991), 174n1, 318n82 Severin v. U.S., 99 Ct. Cl. 435 (1943), 249 SMS Data Products Grp., Inc. v. United States, 900 F.2d 1553, 1555 (Fed. Cir. 1990), 65n109 Snyder-Lynch Motors, Inc. v. U. S., 154 Ct. Cl. 476, 292 F. 2d 907 (1961), 114n72 S.O.G. of Arkansas v. U.S., 546 F.2d 367, 212 Ct. Cl. 125, 127-28 (Ct. Cl. 1976), 104–105 Southern Comfort Builders, Inc. v. United States, No. 00-542C, July 29, 2005, 215, 216 Spradlin Rock Products, Inc. v. Public Utility District No. 1, 266 P.3d 229 (Wash. App. Nov. 3, 2011), 318n77 Steiny & Co., Inc. v. J.A. Jones Construction Co., 2002 WL 596800 (Cal. App. 2002), 319n86 Stock & Grove, Inc. v. U.S., 493 F.2d 629 (Ct.Cl. 1974), 87n6 Sylvania Elec. Prod., Inc., ASBCA No. 11206, 67-2 BCA ¶6,428, 145

Case Law Index

Thalle Construction Co., Inc. v. WhitingTurner Contracting Co., Inc. 39 F.3d 412 (2d. Cir. 1994), 319n87 Thomas & Marker Constr. v. Wal-Mart Stores, Inc., 2008, 115n96 Thurmont Construction Co., ASBCA No. 13417, 69-1 BCA ¶ 7602, 1969 WL 656 (Apr. 2, 1969), 316n37 Tobin Quarries, Inc. v. U.S., 114 Ct. Cl. 286 (1949), 87n6 Tolar Constr., LLC v. Kean Elec. Co., Inc., 944 So. 2d 138 (Ala. May 19, 2006), 318n76 Trafalgar House Constr., Inc. v. United States, 73 Fed. Cl. 675, 694 (2006), 63n43 Troy Eagle Grp., ASBCA 56447, 2013 WL 1131416 (Mar. 4, 2013), 345n44 Turnkey Enterprises, Inc. v. U.S., 597 F.2d 750 (Ct.Cl. 1979), 89n34 Uhley v. Tapio Construction Co., Inc., 573 So.2d 390 (Fla. 4th DCA 1991), 114n74 Umpqua River Navigation Co. v. Crescent City Harbor Dist., 618 F.2d 588 (9th Cir. 1980), 88n18 Unis v. JTS Constructors/Managers, Inc., 541 So.2d 278 (La.App. 1989), 256n1 United Contractors v. U.S., 177 Ct.Cl. 151 (1966), 87n8 United States v. Spearin, 248 U.S. 132 (1918), 73–74, 98, 100 Universal Concrete Products v. Turner Const. Co., 595 F.3d 527 (4th Cir. 2010), 256n14 U.S. ex rel. Evergreen Pipeline Constr. Corp. v. Merritt-Meridian Constr. Corp., 890 F. Supp. 1213 at 1220 (S.D. N.Y. 1995), aff’d, 95 F.3d 153 (2nd Cir. 1996), 216

463

U.S. for the Use and Benefit of Superior Insulation Co., Inc. v. Robert E. McKee, Inc., 702 F.Supp. 1298 (N.D. Tex. 1988), 257n19 U.S. Industries, Inc. v. Blake Const. Co., Inc., 671 F.2d 539, 547 (D.C. Cir. 1982), 256n1 Utley-James, Inc., GSBCA No. 5370, 85-1 BCA ¶ 17,816, at 89,109 (1984), 128 Valenzuela Eng’g, Inc., ASBCA Nos. 54939, 55464, 08-1 BCA ¶33,801, 345n44 Weaver-Bailey Contractors, Inc. v. U.S., 19 CI. Ct. 474 (1990), 198n18 Weeks Dredging and Contracting, Inc. v. United States, 13 Cl. CT. 193 (1987), 90n51 Weitz Co. LLC v. MacKenzie House, LLC, 665 F.3d 970, 974 (8th Cir. 2012), 398n23 Western Well Drilling Co. v. U.S., 96 F. Supp 377 (N.D.Cal. 1951), 89n29 W.G. Connell Co., 179 Ct. Cl. at 670, 96 Whiting-Turner Contracting Co., ASBCA No. 56319, 10-1 BCA ¶ 34,436, 345n44 Wm. R. Clarke Corp. v. Safeco Ins. Co., 15 Cal.4th 882 (1997), 257n16 Woodcrest Const. Co., Inc. v. U.S., 187 Ct. Cl. 249 (1969), 87n9 WPC Enterprises, Inc. v. U.S., 163 Ct. Cl. 1, 323 F.32d 874 (Ct. Cl. 1963), 104 WRB Corp. v. United States, 183 Ct. Cl. 409 (1968), 304 Wunderlich v. State of California, 65 C.2d 777 (1967), 88n19 Zachry Construction Corporation v. Port of Houston Auth., 2014, 136n16

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Subject Index

Page numbers followed by f and t indicate figures and tables. AACE International, Forensic Schedule Analysis 29R-03, 189–190, 200n49 acceleration, 139, 149–150; contractors and nonvoluntary, 150; costs and, 148–149, 150; impact on labor productivity, 223, 281; mitigation’s differences, 140; recovery schedules and, 147–148; types of, 142–145, 188–189 accord, legal principle of, 341 action-response model, changes and loss of productivity, 209–210, 210f acts of God. See force majeure conditions actual costs, pricing of claims and change orders and, 267–268, 270–271 additional insured (AI) status, 425–426 adjudication, ADR and, 363–364 Administrative Dispute Resolution Act (ADRA) (1996), 57, 379–380 Administrative Procedure Act, 38 advisory arbitration/fact finding, ADR and, 375 “against the drafter” doctrine (contra proferentem), 96, 103, 106 agreement litigation, subcontractors and, 249–250 “all risk” insurance. See builders risk insurance policies allowance clauses, GMP proposals and, 436–437, 439 alternative delivery methods (ADRs), changes generally and, 431–432. See also design-build contracts; Guaranteed Maximum Price (GMP) contracts Administrative Dispute Resolution Act (1998): binding and nonbinding

processes, 56–57; Boards of Contract Appeals and, 57–60; federal contract claims and, 40, 54–61; filing requirements, 55–56; overview, 55 alternative dispute resolution (ADR), 347–385; alternatives during litigation, 376–378; Automatic Referral Program, 60; formal administrative and judicial resolution, 380–382; predispute methods, 348–355; trial by referee, 379. See also alternative dispute resolution (ADR), initial claims and dispute phase alternative dispute resolution (ADR), initial claims and dispute phase, 355–376; adjudication, 363–364; advisory arbitration/fact finding, 375; arbitration, 370–375; baseball arbitration, 375; Boards of Contract Appeals and U.S. Court of Federal Claims and, 376; dispute resolution boards, 357–363; early neutral evaluation, 356; initial decision maker, 355–356; Med-Arb, MedThen-Arb, and Arb-Med, 366–367; mediation, 364–366; minitrial, 368–369; owner/agency review board, 357; private judge, 370; shadow mediation/Arb-Med, 367– 368; standing or project neutral, 356; summary jury trial, 369 American Arbitration Association (AAA), 331–332, 370–372; changes to arbitration, 374–375; initial decision maker and, 355–356; mediators and, 366

465

466

Subject Index

American Institute of Architects (AIA): arbitration and, 370–371; change order forms and, 264–265; on change orders, 261; claim definition, 3, 13; “concealed or unknown conditions”, 71–72; default termination and, 390; document incompleteness and, 433; initial decision maker and, 355–356; insurance requirements, 423; scopes changes and GMP claims, 439–440; termination of contracts and, 394–396; time requirements for claims notification, 25–26; unit price contracts and, 271 American Society of Civil Engineers, DRB and, 361 appeals, election doctrine and forums for, 32–39, 34t, 35f, 48–51 arbitration: costs and, 329–330, 331–332; of subcontractor disputes, 253–254 arbitration, ADR and, 370–375; AAA rule changes, 374–375; advantages and disadvantage of, 372–374; three track procedures, 371–372 Arb-Med, ADR and, 367–368 Armed Services Board of Contract Appeals (ASBCA), 36, 40, 49–50, 56–58; ADR and, 376, 380; bond costs and, 309; constructive acceleration and, 144– 145; default termination and, 390; equipment costs and, 294; office overhead and, 300 as-built schedule: critical path method and, 180–181, 187, 190–191, 193–195, 196f; daily specific as-built schedule, 161, 164; documentation of delays and, 130 as-planned schedule: critical path method and, 180–181, 182, 190–191, 194, 195, 196f, 197; documentation of delays and, 130 Associated Equipment Dealers (AED), 294 Associated General Contractors of America (AGCA), 293–294, 351, 355 assumptions/clarifications, GMP proposals and, 435–436, 439 attorneys’ fees: mechanic’s liens and, 406; negotiation decisions and, 331–333 auditors, GMP claims and GAAP knowledge, 448 authority: ADR and delegation of, 349–350; negotiation and, 337–338 Automatic Referral Program, of ADR, 60

bargaining-table tactics, 339–340 baseball arbitration, 375 baseline schedules: documentation of delays and, 130–131. See also as-planned schedule bid bonds, 403 bids, estimates, and budgets: bid protests, 31; escrow bid documents and, 348– 349; in records and documentation, 154–155 Blue Book. See Rental Rate Bluebook for Construction Equipment Board of Contract Appeals of the Tennessee Valley Authority, 49–50 Boards of Contract Appeals (BCAs), 33– 37, 34t, 35f, 48–51; ADR and, 54–61, 376, 381; appealing decision of, to federal circuit, 39–40, 52–53; appealing decision to, 48–51; fraud and, 37 bodily injury coverage, in commercial general liability policies, 418 Bodine, Larry, 351–352 bonds: bond claims, 429–430; bond costs, 308–310; loss of bonding capacity claims, 310; types of construction bonds, 400–403 bonus plans for employees, GMP claims and, 443–444 budgets, in records and documentation, 154–155 budget-to-actual cost variance (“earned value”), 155–156 builders risk insurance policies, 307, 419– 421, 426, 430 building information modeling (BIM), 2, 70 business relationships, negotiation and effect on, 326–327 Business Roundtable, 218, 219–220, 282 “but-for” analysis. See collapsed as-built (CAB) analysis Buy American Act, 283 California, subdivision bonds in, 401–403 cardinal changes, defective specifications and, 101 cash flows, in records and documentation, 159 causation: equitable adjustment claim and, 21; loss of productivity and, 210, 211–212

Subject Index

cause, termination for, 395 change order request (COR) forms, 163– 165, 170–171; periodic reports and, 164, 172, 173 change orders and claims: claims identification and change clauses, 17– 20; EJCDC and, 41–48; forms for records and documentation, 163–165, 170–171; periodic reviews of, 165–166; types of change, 205–209 Civilian Board of Contract Appeals (CBCA), 40, 49–50, 54, 58–60, 376, 380 claim identification and notification, 13–67; ADR and federal construction contracts, 40, 54–61; appeal of a BCA or COFC Decision to Court of Appeals for the Federal Circuit, 39–40, 52–54; claims consciousness, 14; federal contracts and the Contract Disputes Act, 28–39, 34t, 35f, 48–52; identification and entitlement to recovery, 14, 15–21; late notice, 26–27; notification, contract owners and, 27– 28; notification of claims and change orders, 22–23; quantum element of claim, 14–15, 21–22; time requirements, 23–26, 41–48 claims adjusters, 423, 428 claims and change orders: avoiding inflation of claims, 326; claims consciousness, 14; claims defined, 3, 13–14, 259–260; CPM and analysis of, 179–182; EJCDC and, 41–48; factors influencing, 2; as integral part of construction process, 1–4; policies and procedures for administration, generally, 6–7; releasing of, after settlement, 341–342. See also pricing, of claims and change orders “claims-made” insurance policies, 413 clarifications/assumptions: duty of clarification, 103–104; GMP proposals and, 435–436, 439 collapsed as-built (CAB) analysis, 190, 193, 195 commercial general liability insurance policies, 415–419, 430; bodily injury and, 421; defense attorneys and, 428– 429; major provisions and exclusions, 416–417, 424–425; subrogation and, 420

467

committee report, GMP claims and, 447 communication, claims identification and, 17 compensable delays, 119–120, 121, 123, 124, 127–128, 129, 134; defined, 117–118 components, distinguished from materials, 283 concurrent delays, 120, 121, 127–129; concurrency defined, 186; four technical conditions, 186–188; subcontractors and suppliers, 248– 249; types of, 128 “conduct of parties,” GMP claims and, 446 confidentiality, importance to negotiations, 337 ConsensusDocs, 258n37, 423; ADR and, 356; claims for additional cost or time, 26; differing site conditions, 72; standard subcontract form, 254–255 construction bonds. See bonds Construction Contract Negotiation Guide, 277–278, 335 Construction Dictionary, 288–289 Construction Industry Institute, 355 construction law, general principles of, 5 constructive acceleration, 142, 143–145, 189 constructive changes: defective specifications, 101; FAR and, 18, 19; untimely inspection and, 110 consultants, recovery of fees of, 311 contemporaneous period analysis (CPA), 191–192, 194, 196f contemporaneous schedules, documentation of delays and, 130–131 contemporaneous understanding of criticality, 194–195, 200n49 contingency clauses, GMP proposals and, 437–439 contingency use: administration and, 447– 448; reimbursability issues and, 446–447 contra proferentem principle (“against the drafter”), 96, 103, 106 Contract Disputes Act (1978): bid protests contrasted, 31; election doctrine and forums for appeal, 32–39, 34t, 35f, 48– 52; federal contracts and, 28–39; final decision, contents of, 30–31; final decision, impact of failure to request, 29–30; final decision, request for,

468

Subject Index

28–29; fraudulent claims and, 326, 381; interest costs and, 307; rights of appeal, 30–31; role of, 32 contract documents, requirements for entitlement, 16 contract price, EJCDC and, 43 contract specifications, interpretation and requirements of, 91–116; conclusion, 110–111; defective specifications, 98– 103; duty to inform, 106–107; duty to inspect, 108–110; duty to proceed, 107–108; duty to seek clarification, 103–106; interpretation rules, 92–98; liquidated damages in, 132–133; negotiation requirements, 322–323; rules as concepts of, 92 contract times, EJCDC and, 44 contractor, termination by, 394, 395–396 contractor-caused delays, 126 contractor-controlled insurance program (CCIP), 422 Contractor’s Equipment Cost Manual (AGC), 293–294 contractor’s fee, EJCDC and, 43–44 contractor’s protective professional liability insurance policy, 414 controlled insurance program (CIP), 421–422 convenience, suspension for, 395 convenience, termination for, 391–394; actions to take under notice of, 392; constructive termination, 393; contractor recovery and, 392–393; deductive change versus, 393–394; owner’s rights and, 391–392 correspondence, transmittal, and submittal logs, in records and documentation, 159–160 cost reports, pricing of claims and change orders and, 268–269 cost-accounting, equipment costs and, 290 cost-based billing, GMP claims and, 446–447 cost-plus federal contractors, negotiation and, 332 court-appointed experts, ADR during litigation and, 378 cover letter, for change order status report, 173 craftsperson questionnaire sampling, loss of productivity analysis and, 217

critical activities, recovery schedules and, 147–148 critical path method (CPM), 175–200; acceleration types, 188–189; analysis methods compared, 194–195, 196f, 197; baseline development, 182–183; benefits of, 176–177; concurrent delays, 186–188; contemporaneous understanding of criticality and, 194– 195; daily reports and, 161; described, 176; early completion and, 184–185; float and, 184–185; network diagrams of, 175, 176; project schedule preparation, 177–179, 182–183; records and documentation and, 158– 159; schedule analysis for claims support, 189–193; schedule for pricing claims, 262; schedule submission for payment, 312–313; software for, 177; subcontractors and, 244–245, 248; use in claims analysis, 179–182 critical path, of project, 134–135; delays and, 121–123, 125–132 criticality, contemporaneous understanding of, 194–195 cumulative impact studies: claims costs and, 166, 202–203, 342; loss of productivity and, 217–218, 217f, 226– 232, 228f cure notice, default termination and, 389 custom, in contract interpretation, 95–96 daily reports, in records and documentation, 132, 157, 160–162, 168, 169 daily specific as-built schedule (DSAB), 161, 164 Data Quest, Inc., 293, 295 deductive change, termination for convenience versus, 393–394 default, termination of contract for, 387– 391; actions to take under notice of, 389–390; contractor’s recovery and liability, 391; enumerated circumstances, 388–389; negative ramifications, 387–388 defective specifications, 98–103; cardinal changes, 101; constructive changes, 101; cost and notification aspects, 102– 103; disclosure of knowledge, 101– 102; interpretation of contracts rule,

Subject Index

99–100; material cost claims and, 284– 285; possibility and practicality and, 100–101; suitable designated methods or materials, 98–100 defective work: coverage in commercial general liability policies, 417–418; delays and, 125 Defense Contract Audit Agency (DCAA), 313 defense coverage, in commercial general liability policies, 417 delay analysis, with critical path method, 189–193, 196f delays, acceleration and mitigation of, 139– 152; acceleration, 139, 142–145, 148– 150; mitigation, 139–142, 149; overtime statistics, 150–152, 151f; proving of, 146; recovery schedules and, 147–148 delays, and time extensions, 117–136; causes of delays, 121–124; concurrent delay, 127–129; contractor-caused delays, 126; critical path and float, 117–118; defective work and rework delays, 125; disruption, inefficiencies, loss of productivity, and loss of learning curve, 124–125; documentation, measurement, and proof, 129–132; liquidated damages, 132–133; multiprime contracts and, 126–127; no damages for delay clause, 133; ownercaused delays, 126; pacing delays, 129; remedies for delay, 134; suspension of work, 124; types of delays, 118–120 delegation of authority, ADR and, 349–350 delivery receipts, in records and documentation, 158 depreciation, of equipment, 292 design services: insurance issues, 308, 412, 414–415, 416; productivity and, 204 design-build contracts, changes in, 443, 449–457; applicable standards and, 453–454; baseline for measuring, 449– 450; design-build proposal and, 451; GMP format use and, 449, 451–452; prescriptive specifications/ performance specifications, 452–453; quality assurance/quality control, 454–456; RFP and project requirements, 450–451, 455, 457 diaries. See daily reports

469

differing site conditions, 69–91; contract clauses, 70, 72; delay criteria, 124–125; forces of nature and, 77; investigations prior to bidding and, 77–83; “sub-surface or latent physical conditions at the site differing materially from those indicated in this contract”, 71, 73–76; summary and checklist, prior to bidding, 83–87; “unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract”, 71, 76–77 directed acceleration, 142, 188 disclaimers, for differing site conditions, 80–81 disclosure of knowledge, defective specifications, 101–102 discrete impact studies, loss of productivity and, 217–218, 217f, 223–224 dispute resolution boards (DRBs), ADR and, 357–363; costs, 359–360, 362; effectiveness and success, 360–362; international applications, 362–363; procedures, 358–359 dispute resolution ladder, ADR and, 350 Dispute Review Boards and Other Standing Neutrals (Hafer), 362 disputes clause, duty to proceed and, 108 disruptions, delays and, 124–125; lost productivity and, 280–281 DRBF Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute Adjudication Boards, 359 duty of performance, 244 duty to inform, 106–107 duty to inspect, 108–110 duty to mitigate delay, 140–141 duty to proceed, 107–108 duty to seek clarification, 103–106 early completion, 184–185 early identification, importance of, 15–16 early neutral evaluation, ADR and, 356 earned-value analysis (budget-to actual cost variance), 155–156, 191, 217, 233 efficiency, delays and loss of, 126–127 Eichleay formula, 300–302

470

Subject Index

Election Doctrine, forums for appeal, 32–39, 34t, 35f, 48–51 Electronic and Missile Facilities, Inc., 145 Ellis, Dr. Ralph, 361 e-mail, record keeping and cautions about, 166–167 emergency relief, arbitration and, 374–375 employee costs, GMP claims and, 443–445 Engineering News Record, 288 Engineers Joint Contract Documents Committee (EJCDC), 13; differing site conditions, 72–73; insurance requirements, 423, 424; time requirements for claims notification, 26, 41–48 entitlement. See recovery, identification and entitlement to entitlement to recovery. See recovery, identification and entitlement to environmental factors, changes and loss of productivity, 206 environmental/pollution insurance policies, 421 Equal Access to Justice Act (EAJA), 34–36, 38–39, 52, 211, 311, 332–333 equipment costs, for claims, 288–296; actual incurred costs, 292–293; additional use calculation, 289–292; equipment defined, 288–289; GMP claims and, 442–443; industry guides for, 293–296 equitable adjustment claim, cost identification and, 21 errors and omissions insurance policies, 413–415 escrow bid documents (EBD), ADR and, 348–349 estimated costs method, pricing of claims and change orders and, 271–272 estimates, in records and documentation, 154–156 exceptions, GMP proposals and, 434–435, 439 excess and umbrella liability policies, 419 exclusions, GMP proposals and, 434–435, 439 excusable delays, 118–119, 124, 127–128, 134; acceleration and, 143–145, 150 experience/expertise, GMP claims and, 437–439 expert opinion costs, recovery of, 312

express warranties, suppliers and disclaiming of, 246 external factors, changes and loss of productivity, 208–209 extra work, pricing of claims and change orders, 279 False Claims Act, 37, 326, 381 faulty workmanship, builders risk insurance policies and, 420–421 Federal Acquisition Regulations (FAR): ADR and, 55–56, 379–380; changes clause, 4, 18–20; convenience termination and, 392–393; default termination and, 389, 390; “differing site conditions” clause, 70, 72, 81; legal fees and, 310; materials costs recovery and, 286; notification time requirements, 23–25; office overhead and, 300; recovery of attorneys’ fees and, 332; “Schedules for Construction Contracts” clause in, 146 Federal Arbitration Act, 331 federal circuit courts, alternative dispute resolution and, 54–61 federal contracts. See public (government) contracts federal cost principles, 313 field overhead, 298 final decisions: appealing to agency board of contract appeals, 48–51; contents of, 30–31; impact of failure to request, 29– 30; request for, 28–29 financing costs, records and documentation and, 159 “first-in-time” rule, mechanic’s liens and, 405 fixed costs, overhead and, 297–298 float: critical path method and, 184; defined, 118; delays and, 118, 121, 123, 127–129, 134, 184; early completion and, 184–185 follow-form insurance policies, 419 force majeure conditions: builders risk insurance policies and, 419; delays and, 120, 123, 128; differing site conditions, 77 forensic schedule analysis (FSA), CPMbased, 180–182, 189–194, 196f Forfeiture of Fraudulent Claims Act, 326

Subject Index

forward pricing, change orders and, 260, 261–266, 276; advantages of, 260, 262– 263; material claims, 265–266; risks in, 263–264; standard formats and, 264–265 fragmentary networks (“fragnets”): delay analysis and critical path method, 190, 192–193, 194, 196f, 199n42; duty to mitigate and, 141 frame of reference, claims identification and, 16–17 functional concurrency, 128–129, 187 general liability insurance, 307 general-condition costs (field overhead), 298 geotechnical design summary report (GDSR), ADR and, 350–351 Getty, J. Paul, 339 good-faith conduct, in negotiations, 338 Government Accountability Office Contract Appeals Board (GAOCAB), 49–50 gross concurrency, 128–129 Guaranteed Maximum Price (GMP) contracts, 432–448; administration and use of contingency, 447–448; auditors and GAAP, 448; baseline for measuring, 432–434; design-build contracts and, 449, 451–452; employee costs, 443–445; equipment costs and, 442–443; less than 100% complete documents, 432–433, 434–439; reimbursability issues and use of contingency, 446–447; scope changes and, 439–440; self-performed work costs, 445–446; shared savings and, 448; value engineering proposals and, 440–442 handling and processing costs, material cost claims and, 286 Hanna’s models, loss of productivity and, 228–229 Harty, Martin J., 380 Hawthorne Effect, 222 hold-harmless obligations: in commercial general liability policies, 418; contractual liability coverage and, 424–425 home office overhead, 298, 300–302, 303 human reactions, changes and loss of productivity, 208

471

Ibb’s models, loss of productivity and, 227, 229–230, 229f idle equipment, calculation for recovery of costs of, 291–292 impact costs, 278–279 implied warranties, suppliers and disclaiming of, 246 impossibility/impracticality, defective specifications and, 100–101 improper rejection/acceptance, interpretation of contracts, 108–110 inadequate investigation, prior to bidding, 78–80 indemnity coverage: in commercial general liability policies, 418; contractual liability coverage and, 424–425; indemnity bonds, 401 inefficiency costs, computing of, 149 inflation, material cost claims and, 284 initial decision maker (IDM), ADR and, 355–356 injury, equitable adjustment claim and, 21 insurance agents and brokers, 423 insurance issues, 411–430; additional insured status, 425–426; builders risk policies, 307, 419–421, 426, 430; certificates of insurance, 426; claims process, 426–429; commercial general liability policies, 415–419, 430; contractual liability coverage interfacing with indemnity/holdHarmless agreements, 424–425; coverage complexity, 411–412; environmental/pollution policies, 421; equipment and, 293; excess and umbrella liability policies, 419; greatest risk to rights, 412, 426–427; immediate claim reporting required, 412, 426–427; insurance requirements clauses in contracts, 423, 424; other policy types, 422; players in insurance procurement and claims, 422–423; pricing of claims and change orders and, 307–308; professional liability policies, 413–415; requirements clauses in contracts, 423, 424, 426; workers’ compensation and employers’ liability policies, 421; wrap-ups and controlled insurance programs, 421–422

472

Subject Index

interest costs: equipment costs and, 293; pricing of claims and change orders, 306–307 international contracts: adjudication and, 363–364; DRB and, 362–363 International Federation of Consulting Engineers (FIDIC), 13, 365 interpretation of contracts, rule of, 92; conduct of parties, 97–98; contract as whole, 93–94; custom and usage, 95– 96; “against the drafter” principle, 96, 103, 106; language and, 93, 94–96; Parol Evidence Rule, 96; reasonableness, 92–93 investigation of sites, prior to bidding, 77– 83; disclaimers for differing site conditions, 80–81; inadequate investigation, 78–80; reasonable investigation, 77–78; report form, 85–87; representations of conditions, 82–83 JAMS-Endispute, 366 job cost accounting systems, for records and documentation, 155–156 job cost report, 268 judges: ADR during litigation and, 370, 377–378 Judicial Arbitration and Mediation Services (JAMS), 366 labor: equipment costs and, 288, 290; laboronly cost reports and, 268–269; work crew size and lost productivity, 281, 282 labor and materials payment bonds, 400 labor productivity. See loss of productivity language, in contract interpretation, 93, 94– 96; three step method of evaluating, 94–95 late notice of claims, 26–27 learning curve, delays and loss of, 124–125 legal concepts and rights, requirements for entitlement, 16 legal fees, pricing of claims and change orders, 310–311 Leonard’s model, loss of productivity and, 227–228, 228f less than 100% complete documents, GMP claims and, 432–433, 434–439 leverage, using in negotiations, 338–339

liability: equitable adjustment claim and, 21; loss of productivity and, 210, 211–212 licensing requirements, for subcontractors, 254 liens, 399, 403. See also mechanic’s liens liquidated damages, nonexcusable delays, 132–133 literal concurrency, 128–129, 187 litigation: ADR alternatives during, 376– 378; costs and, 328–329; insurance coverage and, 429 location factors, changes and loss of productivity, 206 loss of productivity, 201–242, 279–283; analysis process, 280; causation and liability and, 210, 211–212; change and, 204–210, 210f; delays and, 124– 126; elements of, 280–283; factors affecting and importance of, 203–204; productivity improvement methods, 232–233; quantification of damages and, 212–232, 217f, 219f, 222f, 225f, 228f, 229f, 231f; records and documentation issues, 201–203, 232; types of changes and, 205–209 Lukas, Joseph A., 338–339 mail and delivery receipts, in records and documentation, 158 managerial actions, changes and loss of productivity, 207–208 mandatory mediation, 374 material costs/claims: additional quantity costs, 287–288; categories of claims, 283–284; changed work and, 276, 277; cost calculation, 287–288; factors affecting pricing, 265; materials and components distinguished, 283; other costs associated with, 286; reasons for claims, 284–286; unavailability of materials, 284–285 material receipts, in records and documentation, 158 materials and methods, defective specifications and specified, 99–101 measured-mile analysis, 125, 149, 191; development guidelines, 213–216; loss of productivity and, 212–213; pricing of claims and change orders and, 267–268, 272

Subject Index

Mechanical Contractors Association of America (MCAA), 233, 278; Factors, 224–227, 225f mechanic’s liens: ADR and, 382; intended claimants, 404–405; lien priority and, 405; preliminary notice, 405; procedural background, 404; remedies for, 251; timing of recording, 405–406 Med-Arb (mediation-arbitration), ADR and, 366–367 mediation: ADR and, 364–366; of subcontractor disputes, 253–254 Med-Then-Arb, 366–367 Miller Act, 251–252, 307, 311 minitrial, ADR and, 368–369 mitigation, of delays, 139–142, 149; acceleration’s differences, 140; costs and, 140–141, 142; owner’s obligations, 141–142 Modification Impact Evaluation Guide (U.S. Army Corps of Engineers), 262 modified total-cost method, 277; of comparing costs, 156; loss of productivity and, 230–232; overhead on large claims and, 299; pricing of claims and change orders, 305–306 multiprime contracts, delays and, 126–127 named insured persons, 425 “named perils” insurance policies, 419 National Electrical Contractors Association (NECA), 151, 220, 221, 222–223, 224, 254, 296 negotiations, 321–345; authority to make agreement, 337–338; bargaining-table tactics, 339–340; benefits of successful, 321–322, 342–343; claim rights preservation and presentation, 325– 327; confidentiality and, 336–337; contract requirements and, 322–323; delay avoidance, 338; forums for, 330– 333; good-faith conduct and, 337; internal consensus on goals, 324; leverage use, 338–339; listening to opponents, 339; preparation for, 333– 336; settlement bottom line considerations, 324–333; term sheet drafting, 340–341; unresolved claims and, 341–342

473

“no damages for delay” clause, 133, 244, 330 noncompensable delays, 119, 120–121, 123, 124, 127–128, 134 nondiscrete delays, 121 nonexcusable delays, 118–119, 128, 132–133 “nose” and “tail” insurance coverage, 413 “not part of contract,” duty to seek clarification and, 106 notice of claims, in claims process, 426–428 notice to proceed (NTP), 262, 355 notification, of claims and change orders, 22–23, 102–103; appealing decisions of, 48–49; contract owners and, 27–28; negotiation and preservation of rights, 325 occurrence policies, commercial general liability policies as, 416 Office of Dispute Resolution for Acquisition (ODRA), 49–50 operating period, equipment costs and, 293 opponents, understanding of and listening to, 336, 339 oral agreements, in contract interpretation, 96 original estimates, pricing of claims and change orders and, 268 overcrowding and trade stacking, lost productivity and, 281–282 overhaul costs, of equipment, 293 overhead costs, 296–302; fixed and variable costs and, 297–298; large claims and, 299 overinspection, 108–110 overruns: GMP claims and, 447–448; pricing of claims and change orders and, 270–271 overtime, 150–152, 151f; GMP claims and, 444; loss of productivity studies, 218– 221, 219f; lost productivity and, 282–283 owner/agency review board, ADR and, 357 owner-caused delays, 126; bond costs and, 309–310; material cost claims and, 284 owner-controlled insurance program (OCIP), 421–422 owner-directed changes: bond costs and, 309–310; EJCDC and, 42; insurance

474

Subject Index

costs and, 307–308; material cost claims and, 285–286 owner’s protective professional liability and indemnity insurance policy, 414 pacing delays, 129 Parol Evidence Rule, 96 partnering, ADR and, 351–355; elements of success, 352–353; history of, 351–352; obstacles to, 353–354; results of, 354– 355 partnering, DRB and, 363 Partnering for Success (Warne), 355 pass-through claims, subcontractors and, 250 pay applications, pricing of claims and change orders and, 269 pay-if-paid/pay-when-paid provisions, of subcontractors, 250–251 payment bonds, 400 performance bonds, 400 periodic reviews, in records and documentation, 165–166 photographs and videos: logs of, 160, 162; pricing of claims and change orders and, 270; in records and documentation, 162–163 possibility and practicality, defective specifications and, 100–101 post pricing, 260–261, 266, 276–277; actual costs, 267–268; cost analysis, 266–267; cost estimation, 271–272; job data categories, 268–271 precedents, claims and setting of, 328–329 prescriptive specifications/performance specifications, design-build contracts and, 452–453 presentiment period, for federal contract claims, 23 previous work, in contract interpretation, 97 pricing, of claims and change orders, 259– 320; bond costs, 308–310; claimpreparation costs, 310; equipment costs, 288–296; expert opinion costs, 312; federal cost principles, 313; forward pricing, 260, 261–266, 276; impact and inefficiency costs, 278– 283; insurance costs, 307–308; interest costs, 306–307; legal fees, 310–311; material costs, 283–288; overhead costs, 296–302; post pricing, 260–261,

266–272, 276–277; profit and, 296–297, 302–304; request for equitable adjustment proposal, 272–278; submission schedules, 312–313; total cost methods, 304–306 Primavera CPM software, 177 private contracts, 4–5; ADR and, 381–382; time requirements for claims notification, 25–26 private judge, ADR and, 370 production reporting, in records and documentation, 157–158 productivity: productivity factor/ productivity index, 204; rates of and pricing of claims and change orders, 267, 277–278; ways to improve, 232–233. See also loss of productivity products of policyholder, in commercial general liability policies, 418 professional liability insurance policies, 413–415, 430; common exclusions, 414–415 profit, 296–297, 302–303; unperformed work and, 303–304 progress reporting, records and documentation and, 158–159 Project CPM software, 177 project factors, changes and loss of productivity, 206 project neutral, as optional dispute resolution procedure, 356 project record, documentation of delays and, 131–132 project schedules: acceleration and, 146; records and documentation and, 158– 159, 164–165. See also critical path method (CPM); delays, and time extensions project team factors, changes and loss of productivity, 206–207 property damage, commercial general liability policies and, 416, 418 proposed change order requests (COR), logs of, 160 proprietary specifications, suppliers and, 247 public contracts, 4; Contract Disputes Act and, 28–39; dispute resolution and, 380–382; time requirements for claims notification, 23–25 purchase orders, suppliers and, 246

Subject Index

quality assurance/quality control (QA/ QC) plan, design-build contracts and, 454–456 quantification, of loss of productivity damages, 212–232, 219f, 222f, 225f; cumulative impact studies, 226–230; project-specific studies, 212–226; total cost methods, 230–232; ways to strengthen, 230, 231f quantities of work, pricing of claims and change orders and, 269 quantum element of claim, 14–15, 21–22; cost identification and support, 21–22; recovery prerequisites, 21 RAMI plan (reliability, availability, maintainability, and inspectability), design-build contracts and, 450 reasonable investigation, prior to bidding, 77–78 reasonableness, zone of, 104–105 reasonableness standard, in contract interpretation, 92–93 receipts, documenting of material and delivery, 158 records and documentation, 153–174; bids, estimates, and budgets, 154–155; cash flows, 159; change orders an claims forms, 163–165, 170–171; correspondence, transmittal, and submittal logs, 159–160; daily reports, 160–162, 168, 169; delays and, 129– 132; document management, 167; e-mail and social media cautions, 166– 167; importance of, 153–154, 167; job cost accounting systems, 155–156; loss of productivity impacts and, 201–203, 232; mail and delivery receipts, 158; materials costs recovery and, 287–288; negotiation and, 327; of overhead costs, 298; periodic reviews, 165–166; photographs and videos, 162–163; pricing of claims and change orders and, 269–270; production reporting, 157–158; schedules and progress reporting, 158–159; subcontractors and suppliers, 244, 248–249; time cards, 155, 162 recovery, identification and entitlement to, 14, 15–21; changes clause, 17–20; communication, 17; early

475

identification, 15–16; frame of reference, 16–17; importance of identification, 14, 15–16; requirements for entitlement, 16; warning signs of claims situations, 20–21 recovery risk analysis: erosion of recovery and, 329–330; pursuit of claims decisions and, 328–329 recovery schedules, acceleration and, 147– 148 referee, ADR and trial by, 379 reimbursability issues and use of contingency, GMP claims and, 446– 447 Rental Rate Bluebook for Construction Equipment, 291, 294–296, 442 Rental Rates Compilation (AED), 294 repairs, to equipment, 293 request for equitable adjustment (REA) proposal: pricing elements and details, 275–277; pricing philosophy and, 272–273; production rates, 277– 278; unit price considerations, 273–275 request for proposal (RFP), design-build contracts and, 450–451, 455, 457 requests for clarification (RFC), 84 requests for information (RFI): differing site conditions and, 84; logs of, 160 reservation of rights, 202, 325, 428–429 Restatement (Second) of Contracts, 93, 94, 97 retroactive date, in professional liability insurance, 413 retrospective time impact analysis (TIA), 193 reviews, periodic, 165–166 rework delays, 125 rules, as concepts in contract interpretation, 92 satisfaction, legal principle of, 341–342 scope changes, GMP claims and, 439–440 self-performed work costs, GMP claims and, 445–446 settlement judge, ADR during litigation and, 377–378 Severin doctrine, 249–250 shadow mediation/Arb-Med, 367–368 shared savings, GMP claims and, 448 Sheet Metal and Air Conditioning National Association (SMACNA), 224

476

Subject Index

shift work: loss of productivity studies, 218–221, 219f; lost productivity and, 281, 282–283 simultaneous delays. See concurrent delays site access, delays and, 122 site conditions. See differing site conditions; investigation of sites, prior to bidding small tools: equipment distinguished from, 288; project costs and, 288–289, 291 social media: record keeping cautions about, 166–167; records and documentation cautions, 166–167 special master, ADR during litigation and, 377–378 specifications. See contract specifications, interpretation and requirements of speculative costs, profit loss and, 304 sponsoring agreements, subcontractors and, 250 standards, design-build contracts and, 453–454 standing, as optional dispute resolution procedure, 356 statute of limitations, federal contract claims, 23 stop notices, 399, 406; private works projects, 406–407; public works projects, 407–408 storage of equipment, project costs and, 292, 293 subcontractor default insurance (SDI), 310 subcontractors and suppliers, 243–258; claims submitted on behalf of, 29; ConsensusDocs standard subcontract form, 254–255; contractor– subcontractor relationship, 244–245, 256; delays and, 119, 125, 126, 130– 133; documentation of delays and, 248–249; in EJCDc-C-700, 44; general contractor’s duty of performance and, 244; licensing of subcontractors, 254; mechanic’s lien remedies, 251; mediation and arbitration and, 253–254; Miller Act and, 251–252; nonpayment remedies, 252–253; payif-paid/pay-when-paid provisions, 250–251; publication resources, 254; risks and, 243, 245; Severin doctrine and agreement liquidation, 249–250; sponsoring agreements and,

250; subcontractor–owner claims, 245; suppliers and, 245–248 subdivision bonds, 401–403 submittal logs, 159–160 substitutions, proprietary specifications and, 247 “sub-surface or latent physical conditions at the site differing materially from those indicated in this contract”, 71; elements of proof to prevail, 75–76; examples, 73–75 summary jury trial, ADR and, 369 superior knowledge doctrine, 101–102 suppliers, 245–246; drawing approvals and, 247–248; proprietary specifications and, 247; purchase orders and, 246; risks and, 245; schedules of, 248 supplies, defined, 283 Supreme Court, appealing of decision to, 53–54 surety bonds. See bonds taxes: equipment and, 293; materials costs recovery and, 286; profits and, 303 Tennessee Valley Authority, 39, 49–50 term sheets, drafting after negotiations, 340–341 termination, of contracts, 387–398; by contractor, 394, 395; for convenience, 391–394, 395; for default, 387–391; private clauses, 394–396 time cards, in records and documentation, 155, 162 time extensions: constructive acceleration and, 143–145; as delay remedy, 134; duty to mitigate delay and, 140–141; proving delays, acceleration and, 146 time impact analysis (TIA), 141, 192–193, 194, 196f, 199n42 time requirements, claims notification and, 23–26 time-lapsed photographs, 162 Tools and Equipment Rental Schedule (NECA), 296 “Top 10 Mistakes Made in Project Negotiations” (Lukas), 338–339 tort, defined, 32 total cost methods, 277; loss of productivity and, 230–232; overhead on large

Subject Index

claims and, 299; pricing of claims and change orders, 304–306 total-cost methods, of comparing costs, 156 trade stacking, lost productivity and, 281– 282 transmittal logs, 159–160 transportation, material cost claims and, 286 trial by referee, 379 trigger of coverage, in commercial general liability policies, 416–417 trust fund statues, payment of subcontractors and, 253 Tucker Act, 32 umbrella liability insurance coverage, 419 unauthorized changes, EJCDC and, 43 unavailable materials, material cost claims and, 284–285 unchanged work, impact costs of changed work and, 278–279 underground projects, geotechnical design summary report and, 350–351 underruns: GMP claims and, 447–448; pricing of claims and change orders and, 270–271 underwriters, 423 unit costs, pricing of claims and change orders and, 270 unit price contracts, request for equitable adjustment proposal, 273–275, 277 United States Court of Appeals for the Federal Circuit: ADR in, 60–61; appeal of decision of, 39–40, 52–54 “unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract”, 71; examples, 76–77 unperformed work, profits and, 303–304 unresolved claims, preserving rights to pursue, 341–342 untimely inspection, 109–110

477

U.S. Army Corps of Engineers, 105, 223– 224, 227, 262, 296, 261–352 U.S. Court of Federal Claims (COFC): ADR and, 376, 381; alternative dispute resolution and, 54–61; appeals and, 32, 33, 34t, 35f, 37–40, 51–54, 53 U.S. Department of Veterans Affairs, 297 U.S. National Committee on Tunneling Technology, DRB and, 358 usage, in contract interpretation, 97–98 Utley-James, Inc, 128 value engineering (VE) proposals, GMP claims and, 440–442 variable costs, overhead and, 297–298 variation in estimated quantities (VEQ) clauses, 275, 277 videos. See photographs and videos Virginia Supreme Court, 27 voluntary acceleration, 142, 188 voluntary settlement conference, ADR during litigation and, 377 Warne, Thomas R., 355 warning signs, of claims situations, 20–21 warranties, suppliers and disclaiming of, 246 weather-related delays, 123–124, 221–222, 222f; duty to mitigate and, 140–141 work change directives, EJCDC and, 41–42 work hours: pricing of claims and change orders, 279–283. See also overtime work sampling, loss of productivity analysis and, 217 work suspension: after claim notification, 22–23, 24–25; delays and, 126; duty to proceed and, 107–108; termination by contractor and, 396 workers’ compensation and employers’ liability insurance policies, 421 work-in-progress report, 268 wrap-ups and controlled insurance programs, 421–422 zone of reasonableness, 104–105