LAW: The Contractor's Side

Dec. 28, 2000
In my February column (2/96), I wrote about the "ripple effect" of change orders, and advised contractors that they needed to consider the time and productivity impacts of changes on unchanged work when pricing changes. In this column, I will address this subject in the context of a federal case involving defective specifications and poor contract administration on the government's part.

In Hardrives Inc. (IBCA Nos. 2319/2514 et al.), the Interior Board was faced with a case involving defective specifications and misadministration of the contract by an architect-engineer.

In my February column (2/96), I wrote about the "ripple effect" of change orders, and advised contractors that they needed to consider the time and productivity impacts of changes on unchanged work when pricing changes. In this column, I will address this subject in the context of a federal case involving defective specifications and poor contract administration on the government's part.

In Hardrives Inc. (IBCA Nos. 2319/2514 et al.), the Interior Board was faced with a case involving defective specifications and misadministration of the contract by an architect-engineer. On May 15, 1986, the Bureau of Reclamation (BOR) awarded a contract in the amount of $6,743,617.65 to Hardrives Inc. The contract covered construction of about 14.1 miles of concrete-lined canal and the Kleck Road turnout.

The contract included the federal government's contract-change clause in effect at that time, under which the contracting officer was given the right to make changes within the general scope of the contract. Pursuant to the clause, if any change caused an increase or decrease in the contractor's cost, or the time required for performance of any part of the work-whether or not changed by the change order-the contracting officer was required to make an equitable adjustment and modify the contract in writing.

Except for proposals based on defective specifications, no proposal for any change was to be allowed for any cost incurred more than 20 days before the contractor gave written notice: In the case of defective specifications for which the government was responsible, the equitable adjustment was to include any increased cost reasonably incurred by the contractor in attempting to comply with the defective specifications.

To ensure proper water flow, the canal had to be built at specified elevations. The grading work included both excavation and fill, with more dirt being required than was available from the cut. Under the terms of the contract, the contractor was to use all the material excavated from the canal bed before it would be paid for obtaining borrow fill elsewhere. In determining its bid price and anticipated schedule, Hardrives relied upon the station-to-station cut/fill information in the computer printout included in the contract documents, as well as the related drawings supplied by the BOR. From the documentation, Hardrives was able to determine the haul distances and balance points, and use this information to determine the most efficient way to move the material.

During the first stage of earthwork, the contractor had to construct a preliminary canal embankment. Hardrives built a "pad" upon which the trencher traveled while trimming the final inside shape of the canal cut. The company had to estimate the amount of dirt needed and the amount to be removed by the trencher, so that it would not require more to complete an operations-and-maintenance road that ran along the canal. After the trencher formed the prism, a continuous-paving machine was used.

During performance of the earthwork, Hardrives' surveyor discovered that the original ground elevations were lower than indicated in the contract by an average of 0.8 ft-in some areas, the elevations were as much as 2 ft lower than originally indicated. The surveyor also discovered that the survey benchmarks were not accurate. Hardrives informed the BOR's engineer of the discrepancies and was ordered to continue working. This engineer later advised the bureau that erroneous aerial surveys had caused the elevation errors, which contributed to the additional earthwork.

In addition to random elevation errors and the faulty shrink factor-undisclosed-the BOR's engineer had artificially lowered all ground elevations in the contract by 0.25 ft to account for settling that would be caused by earthmoving equipment. Bidders were not notified of this adjustment, even though it affected pay quantities for excavation of the canal and its embankment.

For borrow area C, near the canal, the contract specified that contractors could dig a 4-ft-deep hole to secure borrow. Unknown to the bidders, a new owner had obtained this property and would only allow the contractor to excavate dirt by leveling the property and removing the top portion of soil. This method required more work, time and expense than removing borrow from a hole.

Finally, a rocklike material referred to as caliche (a calcium carbonate crust) was discovered during construction, primarily at two sites. The material could not be broke up by finger pressure or by hand without a tool. In one location, the hard substance had to be lifted from the canal and relocated, which involved overexcavation, removal and placement of additional material in the embankment.

Needless to say, all the above conditions caused the project to have substantial cost and time overruns. Hardrives sought to recover these costs in the proceeding before the Interior Board, using a modified total-cost approach. In a lengthy opinion, the Interior Board offered the following opinions and observations:

  • It is implied that the government warrants the correctness and adequacy for the job of design specifications,
  • The warranty is not superseded by disclaimers,
  • When defective specifications cause extra work, extra costs and delays, the contractor is entitled to recovery-either as a breach of contract or a constructive change under the changes clause,
  • The full extent of defective specifications, contract mismanagement and their impact may not be known until the work is complete,
  • A contractor is not obliged to proceed when a change authorization is issued, but only after a change order is issued,
  • Unreasonable administration of a contract, or unreasonable delay by the government in meeting an obligation it was required by the contract to fulfill, is a breach of the duty to cooperate,
  • All delay due to defective specifications is compensable,
  • Multiple specification errors and severe administrative problems may cause the abandonment of the contract schedule,
  • The total-cost approach of quantification is acceptable where there are concurrent, overlapping and continuous problems and delays chargeable to the government for which it is virtually impossible-or highly impractical-to segregate the costs and impact,
  • The Eichleay method is appropriate to determine home-office overhead recovery when, due to government delay, a contractor cannot undertake other jobs during the contract period, and
  • A profit of 10% is a fair and reasonable profit rate.
Under the federal government's changes clause, claims based on defective specifications are treated differently in at least two aspects. First, the notice provision under which no costs incurred more than 20 days before giving notice of a change is inapplicable.

Second, and perhaps most important, in the case of defective specifications for which the government is responsible, the equitable adjustment shall include any increased costs reasonably incurred by the contractor in attempting to comply with defective specifications. In the Hardrives case, the Interior Board spelled out what type of costs should be included in the equitable adjustment.

Such costs clearly include time-related costs, impact costs and acceleration expenses. It is extremely difficult to quantify such costs and time on a project that is so filled with design defects as the contract was in the Hardrives' case. At the same time, the federal government-and other government owners-want contractors to sign off on change orders, to waive their rights to such costs. Perhaps the Hardrives case can be used to demonstrate the problem to owners.

Editor's note: Effective March 1, Cordell Parvin became a shareholder in the law firm of Leonard, Hurt & Parvin, a professional corporation with offices in Austin, Texas; Dallas; Houston; Richmond, Va.; and Washington, D.C. Leonard, Hurt & Parvin provides services for the construction industry, including privitization-project financing, Disadvantaged Business Enterprises claim preparation, negotiation, alternative-dispute resolution, litigation, environmental law, securities and international law. Parvin will work out of the firm's Richmond and Dallas offices. You may write to him in care of the editor.

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