LAW: The Contractor's Side

Claims for defective specifications

Cordell Parvin / December 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. 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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