LAW: THE CONTRACTOR'S SIDE: Double the disappointment

July 14, 2014

Contractor, authority at odds at jobsite and in court

Public contractors often encounter contract clauses or even statutes that limit increases in the contract sum from change orders to a specified percentage—often in the 25% to 50% range.

These prohibitions are clearly designed to prevent abuse by public officials who might seek to circumvent competitive bidding requirements by using change orders to add significant scope of work to an existing project. In a recent Virginia case, a public entity successfully convinced a federal appeals court that a statute limiting change orders on public contracts to 25% or $50,000, whichever is greater, also functioned as an absolute cap on a contractor’s claim in litigation. 

Carnell Constr. Corp. v. Danville Redevelop. & Housing Auth., 745 F.3d 703 (4th Cir. 2014) involved a contract let by a public housing authority for site development in the amount of $793,541. Not long after the contractor began work, the parties’ relationship quickly deteriorated as each became disappointed with the performance of the other. The authority complained that the contractor had caused significant delay to the project and had performed defective grading work. The contractor countered that its work was acceptable and that delays occurred as the result of poor planning and sequencing of the grading and erosion-control work. 

As the contract completion date approached, the authority advised the contractor that it would grant no additional time and the contractor must remove its equipment and manpower from the project on the contract deadline regardless of whether the work was complete. In response, the contractor demobilized its forces from the project two weeks before the deadline and demanded compensation for certain unpaid work. The authority denied the request and declared the contractor in default. The contractor sued.

At trial, a jury awarded the contractor $915,000-$515,000 for unpaid work and $400,000 for the authority’s removal of the contractor without sufficient cause. However, the trial court reduced this award to $215,000, relying on a Virginia Public Procurement Act statutory provision that stated as follows:

[a] public contract may include provisions for modification of the contract during performance, but no fixed-price contract may be increased by more than twenty-five percent of the amount of the contract or $50,000 whichever is greater, without the advance written approval of . . . the governing body, in the case of political subdivisions. In no event may the amount of any contract, without adequate consideration, be increased for any purpose, including, but not limited to, relief of an offeror from the consequences of an error in its bid or offer.

The contractor appealed.

The best argument offered by the contractor on appeal was that the statutory provision, as interpreted by the court, constituted an unconstitutional elimination of common law—that is, the law of contracts as previously decided by the courts—and amounted to an unlawful taking of property and a denial of due process. Unfortunately, the appeals court disagreed and ruled that the trial court’s reduction of the award was proper.

With all due respect to the Fourth Circuit, this decision was wrong. Also, the contractor missed the opportunity to pose the best argument to the appeals court—that the trial court’s interpretation of the statute was overly broad and beyond the legislature’s intent. Indeed, the trial court’s decision consisted of nothing more than a mechanical application of the statute’s language without regard to the Virginia legislature’s actual intent underlying the statute. The legislature was obviously concerned with public officials who might use the instrumentality of the change order to award additional unrelated work to an existing contractor. For example, a state highway department official seeking to save time or, worse, favor a particular contractor might execute a change order extending a 1⁄2-mile project by another 1⁄2 mile. Or, a contracting officer might seek to amend a government office building contract to include tenant improvements and perhaps furnishings rather than putting those scopes of work out for competitive bid. Again, the motive may be to favor an existing contractor or to save time, but the legislation’s objective is to protect the public and obtain the best commercial terms through the competitive process. 

The trial court and Fourth Circuit Court of Appeals decision in this case did nothing to serve the rationale underlying the statute. Instead, it introduced a risk into the public contracting process that will, no doubt, result in higher prices on future bids. R&B

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