Monthly Archives: April 2015

ATTORNEY’S FEES AGAINST COMMON LAW PAYMENT BONDS

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imagesOn sophisticated construction projects (federal, Florida public, or Florida private projects), it is not uncommon for a prime (general) contractor to require that certain subcontractors furnish the prime contractor a payment bond.  When the subcontractor furnishes the prime contractor a payment bond, this bond is a common law bond because it is not a bond furnished in accordance with a statutory requirement.  Unlike a statutory payment bond (whether furnished per the Miller Act, Florida Statute s. 255.05, Florida Statute s. 713.23, or Florida Statute s. 337.18) there are no statutory prerequisites in order for a claimant to preserve rights under the common law payment bond.

 

For instance, if the subcontractor that furnished a payment bond has an unpaid subcontractor or supplier, these entities can pursue claims directly against the subcontractor’s payment bond instead of the prime contractor’s (statutory) payment bond. Thus, if the subcontractor’s unpaid subcontractors or suppliers failed to preserve their rights against the prime contractor’s (statutory) payment bond, they can still pursue rights against the subcontractor’s common law payment bond.

 

In USA f/u/b/o Vulcan Materials v. Volpe Const., 622 F.2d 880 (5th Cir. 1980), an earthwork subcontractor furnished a payment bond on a federal project (where the prime contractor would have furnished a Miller Act payment bond).  The subcontractor had an unpaid supplier of fill.  Amongst other claims, the supplier sued the earthworks subcontractor’s payment bond.  The Fifth Circuit found that not only was this payment bond a common law bond, but the supplier (bond claimant) was entitled to attorney’s fees pursuant to Florida Statute s. 627.756.

 

Florida Statute s. 627.756 provides:

 

(1) Section 627.428 (entitlement to attorney’s fees) applies to suits brought by owners, subcontractors, laborers, and materialmen against a surety insurer under payment or performance bonds written by the insurer under the laws of this state to indemnify against pecuniary loss by breach of a building or construction contract. Owners, subcontractors, laborers, and materialmen shall be deemed to be insureds or beneficiaries for the purposes of this section.

 

Thus, even if the bond is a common law payment bond, an unpaid claimant can still recover their attorney’s fees.  Thus, the unpaid claimant gets the benefit of not having to comply with statutory prerequisites to preserve rights under the prime contractor’s payment bond and the recovery of attorney’s fees against a common law payment bond.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

LIMITATION OF LENDER LIABILITY ON FAILED CONSTRUCTION PROJECT (FLORIDA STATUTE S. 713.3471)

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imagesHere is an interesting lender liability dispute by a contractor against a construction lender on a failed construction project with a potentially harsh outcome to the contractor. 

 

In Jax Utilities Management, Inc. v. Hancock Bank, 40 Fla. L. Weekly D948a, (Fla. 1st DCA 2015), a housing development project went belly up, for lack of a better expression.  The developer defaulted under the construction loan and the lender ceased future disbursements under the loan and ultimately foreclosed on its mortgage.  At the time of the default and the lender’s decision to cease future disbursements, the contractor was owed in the neighborhood of $500,000.  The contractor sued the construction lender for equitable relief:  a claim for an equitable lien (presumably as to undisbursed loan proceeds) and for unjust enrichment.  For unknown reasons, the contractor did not assert a statutory cause of action against the lender pursuant to Florida Statute s. 713.3471 which details under Florida’s Lien Law a construction lender’s responsibilities under a construction loan and provides in material part:

 

(2)(a) Within 5 business days after a lender makes a final determination, prior to the distribution of all funds available under a construction loan, that the lender will cease further advances pursuant to the loan, the lender shall serve written notice of that decision on the contractor and on any other lienor who has given the lender notice. The lender shall not be liable to the contractor based upon the decision of the lender to cease further advances if the lender gives the contractor notice of such decision in accordance with this subsection and the decision is otherwise permitted under the loan documents.

(b) The failure to give notice to the contractor under paragraph (a) renders the lender liable to the contractor to the extent of the actual value of the materials and direct labor costs furnished by the contractor plus 15 percent for overhead, profit, and all other costs from the date on which notice of the lender’s decision should have been served on the contractor and the date on which notice of the lender’s decision is served on the contractor. The lender and the contractor may agree in writing to any other reasonable method for determining the value of the labor, services, and materials furnished by the contractor.

(c) The liability of the lender shall in no event be greater than the amount of undisbursed funds at the time the notice should have been given unless the failure to give notice was done for the purpose of defrauding the contractor. The lender is not liable to the contractor for consequential or punitive damages for failure to give timely notice under this subsection. The contractor shall have a separate cause of action against the lender for damages sustained as the result of the lender’s failure to give timely notice under this subsection. Such separate cause of action may not be used to hinder or delay any foreclosure action filed by the lender, may not be the basis of any claim for an equitable lien or for equitable subordination of the mortgage lien, and may not be asserted as an offset or a defense in the foreclosure case.

 

 

The crux of the case was whether the contractor could bypass any of the obligations in this statute (including the statutory liability of a lender for not complying with this statute) and assert common law claims against the lender for unjust enrichment and an equitable lien.  The First District Court of Appeal firmly said NO!  Florida Statute s. 713.3471 precluded the contractor’s common law claims against the construction lender as the contractor’s only recourse, which it did not pursue, was recourse under the statute.

 

What this means is that if a construction lender disregards the requirements of this statute by not properly notifying the contractor when it elects not to fully disburse loan proceeds, the lender’s liability to the contractor is based solely on this statute.  This also means that if the lender complies with the requirements of this statute, it would have no liability to the contractor. 

 

If you are on a failed project, it is imperative to consult with counsel to explore all of your rights and potential avenues of recovery.  In this case, the contractor pursued equitable claims against the lender while strategically trying to bypass the statutory requirements and liability of a lender per s. 713.3471.  Unfortunately, the First District was not sympathetic to these claims for equitable relief holding that the contractor only had statutory relief per s. 713.3471 and did not have any other relief (that would otherwise be available to the contractor under common law).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

RENTAL EQUIPMENT SUPPLIER NOT PROTECTED BY WORKERS COMPENSATION (HORIZONTAL) IMMUNITY

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imagesOh boy! When it comes to workers compensation immunity, suppliers, particularly rental equipment suppliers, better watch out as they are not entitled to the same safeguards as subcontractors when it comes to injuries on a construction project!

 

The Fourth District Court of Appeals in Ciceron v. Sunbelt Rentals, Inc., 40 Fla. L. Weekly D897a (Fla. 4th DCA 2015) rendered an opinion that is not favorable to suppliers when it comes to the protection of workers compensation immunity on a construction project.   In this case, an employee of the demolition subcontractor was injured from a scissor list that was utilized and rented by other subcontractors at the project. The employee sued the rental equipment supplier of the scissor list for negligence.  The supplier moved for summary judgment arguing that it has immunity from such tort claims.  The ultimate issue was whether workers compensation horizontal immunity barred the injured employee’s claim against the rental equipment supplier.

 

Horizontal Workers Compensation Immunity

 

I have previously written about workers compensation immunity on a construction project. Regarding what is commonly referred to as horizontal immunity: “Workers’ compensation immunity has been broadly expanded by the legislature to include subcontractors and sub-subcontractors working at a construction site, precluding an employee of one contracting entity injured on the job from suing another contracting entity working at the same construction site in tort.”  Ciceron, supra. 

 

To this point, Florida Statute s. 440.10(1)(e) states:

  

A subcontractor providing services in conjunction with a contractor on the same project or contract work is not liable for the payment of compensation to the employees of another subcontractor or the contractor on such contract work and is protected by the exclusiveness-of-liability provisions of s. 440.11 from any action at law or in admiralty on account of injury to an employee of another subcontractor, or of the contractor, provided that:

1. The subcontractor has secured workers’ compensation insurance for its employees or the contractor has secured such insurance on behalf of the subcontractor and its employees in accordance with paragraph (b); and

2. The subcontractor’s own gross negligence was not the major contributing cause of the injury.

 

This is referred to as horizontal immunity because one subcontractor is entitled to immunity for injuries caused to employees of another subcontractor.

 

In this case, however, because the supplier of the scissor list was not a “subcontractor,” the supplier was NOT entitled to immunity.  This meant that the injured demolition subcontractor’s employee was entitled to pursue its negligence claim against the supplier of the scissor lift and the supplier did not have immunity under the law.   If, on the other hand, the supplier was a “subcontractor,” then more than likely workers compensation horizontal immunity would have applied to bar the injured employee’s tort claim.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

 

 

CGL INSURANCE AND CONSTRUCTION DEFECTS (DUTY TO DEFEND; TRIGGERING OF CGL POLICY; COVERED RESULTING DAMAGE)

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imagesI previously wrote about insurance coverage issues in a construction defect dispute, specifically in the context of the insurer denying coverage outright and refusing to defend its insured.

 

As a sequel to this posting, a noteworthy opinion was issued by the Eleventh Circuit Court of Appeals in Carithers v. Mid-Continent Cas. Co., 2015 WL 1529038 (11th Cir. 2015) in a commercial general liability (CGL) insurance coverage dispute dealing with construction defects to a house.   This opinion discusses central issues to an insurance coverage dispute in a construction defect context: the triggering of a CGL policy, the duty to defend, the duty to indemnify, covered resulting damage stemming from construction defects, and a claimant resolving a dispute with an insured in order to pursue rights against the insured’s CGL carrier (also known as a Coblentz agreement).

 

In this case, the owners hired a general contractor to build their house.  The general contractor had CGL insurance with products completed operations coverage.  Upon discovering construction defects, the owners sued the general contractor.  The general contractor’s insurer refused to defend the general contractor, meaning the insurer denied coverage (which is the last thing the general contractor ever wants to hear).  The insurer denied coverage because the complaint alleged that the damages were not discovered until 2010; however, the general contractor did not have any CGL coverage after 2008.  Thus, if the manifestation theory applied to trigger coverage (discussed below), there would be no coverage under the CGL policy.

 

The general contractor and insurer then entered into a consent judgment in the action for $90,000 in favor of the owners that assigned to the owners the general contractor’s rights under its CGL policy.  (This forms the framework for what is known as a Coblentz agreement.)  The owners then sued the general contractor’s CGL insurer.

 

The issues in this case were (a) the insurer’s duty to defend its general contractor-insured, (b) the triggering of an occurrence under a CGL policy, and (c) resulting damage covered under the CGL policy.

 

(A) Duty to Defend

 

The insurer’s duty to defend is triggered by the allegations in the complaint.  Here, the Eleventh Circuit held that the insurer had a duty to defend because the duty to defend is broader than the insurer’s duty to indemnify and “all doubts as to whether a duty to defend exists in a particular case must be resolved against the insurer and in favor of the insured.” Carithers, supra, at *4 (quotation and citation omitted). “An insurance company must defend an action where the facts alleged against the insured would give rise to coverage, even if those facts are not ultimately proven at trial.”  Id. 

 

(B) Triggering of an Occurrence Under CGL Policy

 

The insurer wanted the manifestation theory to trigger CGL coverage.  Under this theory, the CGL policy is triggered if the damage is discovered (manifests itself) during the policy period.  

 

The reason the insurer wanted this theory to apply is because the owners admitted that they discovered the damage / defects in 2010 when the general contractor’s CGL policy was no longer in effect.

 

Conversely, the owners wanted the injury-in-fact theory to apply to trigger coverage.  Under this theory, the policy is triggered when the damage occurs even if the damage is not discovered until sometime later.  Here, the trial court found that the damage occurred in 2005 when the general contractor’s CGL carrier was in effect (although the damage was not discovered until 2010).  Because there was evidence and a finding as to when the damage occurred, the Eleventh Circuit held that the injury-in-fact theory was the correct theory to trigger CGL coverage.

 

(C) Resulting Damage Covered Under a CGL Policy

 

The cost of repairing damage to other work resulting from faulty workmanship would be covered under the CGL policy.  In other words, repairing damage to another trade’s work would be covered but repairing / replacing damage to the trade’s own work would not be covered.  The Eleventh Circuit analyzed this application to determine whether the trial court appropriately determined that certain items were resulting damage.

 

(1)  Brick

 

The trial could found that the defective application of exterior brick coating caused resulting damage to the brick itself.  If the exterior brick coating was applied by the subcontractor that installed the brick, then the brick should not be covered since the brick was the subcontractor’s own work as opposed to other work.  However, there was no evidence at the trial level whether the brick coating and installation of the brick was done by the same subcontractor or different subcontractors.  Because the plaintiff owners (who were assigned rights under the policy by the general contractor insured) had the burden of proof on this issue, which they failed to meet, the Eleventh Circuit reversed any damage awarded associated with the brick.

 

(2)  The Tile and Mud Base

 

The trial court found that defective adhesive and an inadequate base caused damage to the tile.  The trial court awarded damage to replace the tile and mud base. Similar to the brick, the issue turned on whether the installation of the tile and mud base was done by the same subcontractor or different subcontractors.  And, similar to the brick, no evidence was offered on this point so the Eleventh Circuit reversed any damage awarded associated with the tile and mud base.

 

(3)  Balcony

 

The trial court found that defects in the construction of the balcony resulted in damage to the garage. However, because the balcony had to be rebuilt in order to repair the garage, the trial court held that this work was resulting damage covered by the CGL policy.  The Eleventh Circuit agreed with the trial court holding that the cost of repairing damage resulting from defective work is covered and since repairing the balcony was part of repairing the garage, these costs would be covered.

 

Important take-aways:

  • This case provides strong arguments to an insured when its CGL carrier denies coverage, specifically based on the argument that its policy was never triggered.  Remember, the duty to defend is broader than the duty to indemnify so any doubts must be resolved in favor of the insured.
  • Don’t forget about the injury-in-fact theory to trigger CGL coverage.  If you have evidence, such as an expert opinion, as to when the damage started to occur, this theory can be valuable if the owner discovered the latent defects after the expiration of your CGL policy.  This helps an owner maximize CGL coverage and a general contractor maximize coverage under its CGL policy.
  • Make sure to meet your burden of proof to establish resulting damage or other damage caused by faulty workmanship.  Make sure to prove that the resulting damage was work performed by a different subcontractor and not the subcontractor that performed the faulty workmanship. And, to this point, make sure to include appropriate language in the consent judgment.
  • Make sure you know how to couch your coverage arguments to an insurer in order to maximize insurance coverage.
  • If your insurer denies coverage, consider entering into what is known as a Coblentz agreement with the claimant where a consent judgment is entered against you and rights under your policy are assigned to the claimant.  The benefit is that in consideration of the consent judgment and assignment of rights, the claimant gives up any rights to collect that judgment against you. 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

SERVING CONTRACTOR’S FINAL PAYMENT AFFIDAVIT BY CONTRACTORS (OR SUBCONTRACTORS) IN PRIVITY OF CONTRACT WITH PRIVATE OWNER

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imagesContractors (or even subcontractors) in privity of contract with a private owner must serve a Contractor’s Final Payment Affidavit within 5 days before foreclosing on the lien. The objective is to swear to the owner the final payment the contractor is seeking and those unpaid lienors working under the contractor.  This is set forth in Florida Statute s. 713.06(3)(d) which provides:

 

 

 

 

 

 

 

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished. The affidavit must be in substantially the following form:

CONTRACTOR’S FINAL PAYMENT AFFIDAVIT

State of Florida

County of _______

Before me, the undersigned authority, personally appeared (name of affiant) , who, after being first duly sworn, deposes and says of his or her personal knowledge the following:

1. He or she is the (title of affiant) , of (name of contractor’s business) , which does business in the State of Florida, hereinafter referred to as the “Contractor.”

2. Contractor, pursuant to a contract with (name of owner) , hereinafter referred to as the “Owner,” has furnished or caused to be furnished labor, materials, and services for the construction of certain improvements to real property as more particularly set forth in said contract.

3. This affidavit is executed by the Contractor in accordance with section 713.06 of the Florida Statutes for the purposes of obtaining final payment from the Owner in the amount of $___.

4. All work to be performed under the contract has been fully completed, and all lienors under the direct contract have been paid in full, except the following listed lienors:

NAME OF LIENOR  _______AMOUNT DUE

Signed, sealed, and delivered this ____ day of ____, ____.

[Add signature and notary seal] 

 

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

 

 

Not timely serving the Contractor’s Final Payment Affidavit 5 days before commencing the construction lien foreclosure action has the unkind affect of invalidating the contractor’s construction lien.  See Timbercraft Enterprises v. Adams, 563 So.2d 1090 (Fla. 4th DCA 1990) (contractor hired to clear land lost its construction lien by failing to timely serve Contractor’s Final Payment Affidavit); Sunair Development Corp. v. Gay, 509 So.2d 1361 (Fla. 2d DCA 1987) (contractor hired to perform painting and carpentry lost construction lien by failing to timely serve Contractor’s Final Payment Affidavit); Bishop Signs, Inc. v. Magee, 494 So.2d 532 (Fla. 4th DCA 1986) (sign contractor lost its construction lien by failing to serve Contractor’s Final Payment Affidavit).

  

If a contractor fails to serve the Contractor’s Final Payment Affidavit before filing its lien foreclosure action, it needs to (a) promptly serve the Affidavit and file an amended complaint within the applicable statutory limitations period, (b) argue that its noncompliance should be excused, or (c) argue that the owner waived the right to invalidate the contractor’s lien through the contractor’s failure to serve a Contractor’s Final Payment Affidavit.

 

A. Serving Affidavit and Amending Complaint within Statutory Limitations Period

 

The Florida Supreme Court in Holding Electric, Inc. v. Roberts, 530 So.2d 301 (Fla. 1988) held that if a contractor fails to timely serve a Contractor’s Final Payment Affidavit before initiating a lien foreclosure lawsuit, the contractor can remedy this noncompliance by serving the affidavit and amending its complaint within the statutory limitations period.  See Holding Electric, 530 So.2d at 302 (“[A]n amended complaint may be filed to show delivery of the contractor’s affidavit, provided the statute of limitations has not run prior to the filing of the amended complaint.”).

 

B. Noncompliance should be Excused

 

In Coquina, Ltd. V. Nicholson Cabinet Co., 509 So.2d 1344 (Fla. 1st DCA 1984), noncompliance with the timely service of the Contractor’s Final Payment Affidavit was excused when the owner contested the lien by recording a Notice of Contest of Lien that shortened the statutory limitations period to foreclose the lien to 60 days and the contractor served the Affidavit 3 days (instead of 5 days) before filing suit.  Notwithstanding, the Fourth District in Pierson D. Construction, Inc. v. Yudell, 863 So.2d 413 (Fla. 4th DCA 2003) still held that the Contractor’s Final Payment Affidavit needed to be served within the applicable statutory limitations period (even if it was not served within 5 days before filing the lawsuit). In other words, not serving it at all could be fatal to the contractor’s lien foreclosure action.

 

Also, the Fourth District in Bishop Signs held, “[t]he applicable concern should be whether it is the type of contract which, by its nature, does not entail the services of subcontractors or the furnishing of labor or material by others.”  Bishop Signs, 494 So.2d at 534. Hence, if the contractor failed to serve the Contractor’s Final Payment Affidavit, it may want to argue that its noncompliance is excused because the type of project it was hired to perform does not entail the services of suppliers or subcontractors.  Though, on most projects, this is a difficult argument to realistically make!

 

C. Owner Waived the Right to Argue Noncompliance

 

In Rivera v. Hammer Head Constr. & Development Corp., 14 So.3d 1190 (Fla. 5th DCA 2009), the contractor failed to serve the Contractor’s Final Payment Affidavit.  The contractor’s complaint pled that all conditions precedent to bringing the action had occurred, had been performed, or were waived.  In response to this allegation, the owner pled is was “without knowledge” as to whether this allegation was true.  The owner, however, did not plead that this was not true because the contractor failed to timely serve a Contractor’s Final Payment Affidavit.  As a result, when the owner raised this issue at trial to invalidate the contractor’s lien, the court held that the owner waived its right to raise this argument because the owner never pled the contractor’s non-performance with any particularity.

 

In conclusion, it is always good practice to timely serve the Contractor’s Final Payment Affidavit within 5 days before filing suit, even if the statutory limitations period is shortened through a Notice of Contest of Lien (or even a lawsuit to show cause).  But, if the Affidavit is not timely served, there are arguments a contractor can raise under the law to try to defeat an owner’s efforts to invalidate the lien due to this noncompliance. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

GOVERNMENT CONTRACTING AND TREATING EXTENDED FIELD OVERHEAD AS A DIRECT OR INDIRECT COST

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Prime contractors working on federal government projects, or any project for that matter, have job site or field overhead / general conditions.  Incurring extended field office overhead on a federal government project happens and, in many instances, is due to differing site conditions or another impact  (e.g., design issue, change order work, etc.) caused by the government.  There are also times the government acknowledges the time impact and agrees to pay the prime contractor extended field office overhead. 

 

How is the prime contractor supposed to compute its extended field office overhead?

 

Federal Acquisition Regulation (F.A.R.) 31.105(d)(3) provides:

 

Costs incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc. [e.g. field office costs], are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor’s established and consistently followed cost accounting practices for all work.

 

Stated differently, F.A.R. allows the prime contractor to treat its field office overhead  as a direct cost or an indirect cost provided the prime contractor does so consistently throughout the project.  However, the prime contractor cannot change its methodology midstream because it learns it can better maximize its extended field office overhead damages by switching methodologies to compute its extended field overhead.

 

What is a direct cost versus an indirect cost? 

 

A direct cost is a cost that is identified specifically with a contract whereas an indirect cost is not identified specifically with a single contract, but identified with two or more contracts.

 

F.A.R. 2.101 defines both direct costs and indirect costs as follows:

 

Direct cost means any cost that is identified specifically with a particular final cost objective [e.g., contract]. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract. All costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives.” See also F.A.R. 31.202.

 ***

Indirect cost means any cost not directly identified with a single final cost objective [e.g., contract], but identified with two or more final cost objectives or with at least one intermediate cost objective.

***

Indirect cost rate means the percentage or dollar factor that expresses the ratio of indirect expense incurred in a given period to direct labor cost, manufacturing cost, or another appropriate base for the same period (see also “final indirect cost rate”).” See also F.A.R. 31.203.

 

When field office overhead is treated as a direct cost, it is computed on a per diem or daily rate (e.g., $10,000 per day for each day of delay). 

 

When field office overhead is treated as an indirect cost, it is computed based on a percentage markup (e.g., adding an overhead markup of 10% on the work). 

 

The key is that the prime contractor typically has to live or die with the methodology it chooses. 

 

An example of this “live or die” approach can be found in the Armed Services Board of Contract Appeals decision in Appeal of—Watts Constructors, LLC, 2015 WL 566315, ASBCA NO. 59602 (January 26, 2015).  Here, the government hired the prime contractor to relocate a sewer lift station at a Marine Corps base.  During construction, the prime contractor encountered a differing site condition. The government did not dispute the differing site condition and instructed the prime contractor to await a contract modification (change order) before proceeding with the additional work.  The prime contractor submitted a cost proposal to the government for the additional work.  The proposal included a percentage markup for overhead as the contractor had also done under a previous cost proposal for additional work. Thus, the contractor had treated its field overhead as an indirect cost.

 

However, the government did not immediately issue the contract modification (change order) to the prime contractor authorizing the contractor to proceed with the additional work due to the differing site condition.  For this reason, the prime contractor wanted to recover its extended field office overhead as a direct cost (as it would give the prime contractor an additional approximate $40,000 and cover its costs due to the government’s delay in issuing the contract modification).  The prime contractor’s position was that when it submitted its original proposal for the changed work with the overhead percentage markup it was not anticipating a time impact, but now that it realized a time impact caused by the government, it should be entitled to its direct costs associated with the impact.  The government, however, denied this request because by the contractor tacking an overhead markup percentage to its proposals it had treated its field office overhead as an indirect cost, not a direct cost. Thus, the prime contractor couldn’t switch its methodology during the course of the project. 

 

The prime contractor submitted a claim pursuant to the Contract Disputes Act; the contracting officer issued a final decision denying the claim.  The prime contractor then appealed the contracting officer’s final decision to the Armed Services Board of Contract Appeals.  The Armed Services Board of Contract Appeals agreed with the government concluding, “[W]e conclude the fact that the contract performance period was extended and that the use of the percentage mark-up might not fully compensate appellant [prime contractor] for all field office overhead costs incurred does not, per se, entitle appellant to change its distribution base.”

 

The underpinning issue regarding field office overhead and whether to apply an overhead percentage markup to modifications (change orders) that do not result in a time impact and a daily rate to modifications that do result in a time impact was the exact issue the Armed Services Board of Contract Appeals dealt with in Appeals of M.A. Mortenson Co., 1998 WL 151792, ASBCA No. 40750 (March 30, 1998). In this matter, the prime contractor tacked an overhead percentage markup for field office overhead for changes that did not result in a time impact and then tacked on a daily rate for changes that did result in a time impact.  Hence, for changes that did not delay the job, the contractor treated its field office overhead as an indirect cost and for changes that did delay the job, the contractor treated its field office overhead as a direct cost. 

 

The government did not challenge the contractor’s daily rate for changes that impacted time, rather, it challenged the overhead percentage the contractor applied on changes that did not actually impact the completion of the project (since the field office was not actually extended by these changes).  The Armed Services Board of Contract Appeals agreed with the government concluding the prime contractor “cannot recover the claimed job site overhead percentage markup in these appeals because, under the facts of these cases, such a markup is inconsistent with appellant’s [prime contractor] per diem distribution base for charging job site overhead on changes that extended the contract period.”

 

Prime contractors working on federal construction projects need to be wary of how to treat changes and if they apply an overhead percentage markup on their changes it could later impact their application of a daily rate for extended field office overhead and vice versa.   Sometimes, the overhead markup benefits the contractor because it is getting a markup for overhead when the job is not otherwise delayed.  However, if the job is delayed, the government may try to deny the extended overhead based on a daily rate methodology that better compensates the contractor for its actual costs since the contractor previously treated such overhead as an indirect cost.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.