I came across a case decided by the U.S. Court of Federal Claims that I thought would serve as a good reminder to contractors bidding public projects of the risks they assume concerning fortuitous losses to the work or stored materials prior to final acceptance by the government.
On Sept. 20, 2000, the Army Corps of Engineers awarded C.R. Pittman Construction Co. a fixed-price contract for construction of the Southeast Louisiana Urban Flood Control Project, Dwyer Road Pumping Station in Orleans Parish, La., which included demolition and removal of the existing pump station and construction of a new pump station. On Sept. 16, 2002, the Corps awarded Pittman a second fixed-price contract for construction of a similar pumping station in nearby Jefferson Parish.
As required under both contracts, Pittman constructed the projects and purchased the necessary equipment and materials, and the Corps made progress payments to Pittman. Pittman had acquired and was storing at an agreed-upon off-site storage facility certain equipment including generators, climber screen cleaners, and pumps. On Aug. 29, 2005, Hurricane Katrina struck the New Orleans area and seriously flooded the storage site. Both parties agreed that the flood damage to the off-site equipment would require total replacement or substantial refurbishment prior to its installation.
On March 6-7, 2006, the Corps demanded that Pittman replace the damaged equipment, and on July 11, 2006, it advised Pittman that because the equipment was useless in its present state, Pittman must pay back to the Corps monies previously earned for the stored equipment. Pittman filed a claim with the Corps seeking payment for replacement of the damaged equipment, which the contracting officer denied.
In its claim and on appeal, Pittman acknowledged that the contract, like all federal contracts, contained F.A.R. 52.236-7, which states, in pertinent part, that “the Contractor shall . . . be responsible for all materials delivered and work performed until completion and acceptance of the entire work, except for any completed unit of work which may have been accepted under the contract.” However, Pittman pointed out that because of the substantial risk of flooding on both projects, the Corps had inserted a special provision into the contracts which placed some of that risk upon the Corps. That provision stated as follows: “The responsibility for damage to any part of the permanent work shall be as set forth in [F.A.R. 52.236-7]. However, if, in the judgment of the Contracting Officer, any part of the permanent work performed by the Contractor is damaged by flood . . . [and] is not due to the failure of the Contractor to take reasonable precautions or to exercise sound engineering and construction practices . . . the Contractor shall make the repairs . . . and full compensation for such repairs will be made . . . as fixed and established in the contract.”
Pittman thus argued that the damage sustained due to flooding was covered by the special provision cited above because the stored equipment, although not yet installed, was part of the permanent work.
The Corps, on the other hand, argued that the term, “part of the permanent work” refers not to parts and pieces that will eventually become incorporated into the permanent work, but rather to an installed subdivision of the whole work. The Corps contended that the damaged equipment was stored materials not covered by the exception.
The court agreed with the Corps and held that “part of the permanent work,” for purposes of the special provision, cannot include uninstalled, unincorporated equipment or pieces. To hold otherwise, the court noted, would be to destroy the distinction between any bolt being manufactured at a factory and the final installed equipment.
The Pittman case should serve as a reminder to contractors that in most public contracts, they assume the risk of damage to the work prior to final acceptance. In my experience, many contractors do not fully account for this risk. Admittedly, if damage or loss to the work occurs as a result of the contractor’s negligence, it is likely covered by Commercial General Liability, or CGL, insurance. However, only Builder’s Risk insurance will cover loss resulting from other causes. Consequently, every estimator’s checklist should include determining where the risk lies under the contract for loss or damage to the work prior to final acceptance, and proper consideration should be given to addressing this risk.