CONSTRUCTIVE CHANGE DIRECTIVES / DIRECTED CHANGES

shutterstock_716540956Prime contracts typically contain a constructive change directive clause.   A constructive change directive also goes by the acronym CCD (and for purposes of this article, such changes will be referred to as a CCD), however it can also be known as a Work Change Directive, Interim Directed Change, or Directed Change, depending on the type of contract beign utilized.   An owner can order a CCD, versus issuing the contractor a formalized change order, as a mechanism to direct the prime contractor to perform work if there is a dispute as to contract amount, time, or scope.  Just because an owner issues a CCD does not mean the owner is conceding that it owes the contractor a change order.  Rather, the owner is ordering the CCD as a mechanism to keep the project moving forward notwithstanding a disagreement with the contractor as to the price or time impact.  Standard form construction agreements such as the AIA, EJCDC, or ConsensusDocs, will have a standard provision dealing with change directives where the owner can order the contractor to proceed with work in the absence of a change order.  In the federal government context, most construction contracts will contain a changes clause that authorizes the government to formally direct changes; and, there is authority for contractors to equitably pursue a constructive change based on certain directives or instructions issued by the government.  Naturally, from the contractor’s perspective, this CCD provision is an important consideration as it could likely require the contractor to finance a change to the owner’s project, particularly if there is a scope dispute where the owner does not believe the contractor is entitled to any change order.  

 

An example in the federal government context can be found in the Armed Services Board of Contract Appeal’s decision in Appeal Of – Buck Town Contractors & Co., ASBCA No. 60939, 2018 WL 679564 (2018), dealing with the reconstruction of a hurricane protection levee.  The prime contract required the contractor to place a layer of geotextile material at the base of the levee.  The specifications required the material placed such that all seams and overlaps were installed perpendicular to the centerline of the levee.  The contractor’s subcontractor, however, placed the geotextile material such that overlaps ran parallel (not perpendicular) to the centerline of the levee.   The government objected to the method of the contractor’s placement of the geotextile material and directed the contractor to remedy the incorrect method (i.e., redo the incorrect work).   The contractor interpreted this instruction or directive as a constructive change directive and submitted a Request for Equitable Adjustment (REA) associated with the directive claiming that it installed the geotextile material based on the interpretation of other provisions in the specifications.  The government denied the REA and the contractor followed-up with a formal claim, which was also denied.

 

The Armed Services Board of Contract Appeals ultimately held that the prime contractor was not being directed to perform additional work, or work contrary to the contract.  The Board found that the contract required the contractor to place the geotextile material so that all seams and overlaps were perpendicular to the centerline of the levee, which necessarily prohibits the contractor from placing seams and overlaps parallel to the centerline.   As a result, the directive for the contractor to redo work was not a constructive change that authorized the contractor to additional compensation.

 

As mentioned above, the CCD provision is a valuable provision for owners in prime contracts to keep the project moving forward.  Contractors need to consider this clause in conjunction with instructions and directives received from the owner during the course of construction that authorizes the contractor to perform claimed additional work as such work can have both a cost and time impact.   If the requirements of the contract are changed and the contractor is directed to proceed with additional work, it is important that the contractor consider the directive in accordance with the provisions of its contract and preserve its rights and notify the owner accordingly. 

 

 

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.

 

 

DON’T DRAFT AN AMBIGUOUS SCOPE OF WORK IN YOUR CONSTRUCTION CONTRACT

images9DHJ23URContractors should spend time carefully drafting and agreeing to a detailed scope of work.  Otherwise, a dispute may arise relating to that scope of work.  This dispute can take the form of a change order dispute where the contractor argues that the subcontractor’s change order request was base contract work and, thus, does not entitle the subcontractor to additional compensation. Or, the dispute can take the form of a defect claim where the subcontractor argues that the defect being asserted against it was never within its scope of work to begin with.

 

If there is a scope of work dispute, a court will look to the contract and any applicable change orders in order to see what the contract requires.  If an ambiguity exists relating to the scope of work, the court will determine whether the ambiguity is a patent ambiguity or a latent ambiguityA patent ambiguity clearly exists on the face of the contract based on defective, insensible, or obscure language used in the contract whereas a latent ambiguity is not apparent from the face of the contract, but becomes apparent when extrinsic / parol evidence is introduced that leads to the contract being interpreted in two reasonably plausible mannersSee Barrington v. Gryphon Investments, Inc., 32 So.3d 668 (Fla. 2d DCA 2010).  With a patent ambiguity, parol evidence (extrinsic evidence used to clarify the intent of the parties relating to a contractual provision) is NOT allowed to clear up the ambiguity; rather, it is up to the trier of fact (judge or jury) to interpret the patent ambiguity without extrinsic evidence explaining the intent of the partiesSee, e.g., Barclays American Mortg. Corp. v. Bank of Central Florida, 629 So.2d 978 (Fla. 5th DCA 1993) (it was up to trier of fact to interpret letter of credit containing 2 different expiration dates).  On the other hand, with a latent ambiguity, parol evidence is allowed to be introduced relating to the parties’ intent to assist the trier of fact in clearing up the ambiguity.

 

r pondThe opinion in Macky Bluffs Development Corp. v. Advance Construction Services, Inc., 2008 WL 109390 (N.D.Fla. 2008) illustrates what can happen if there is an ambiguous scope of work.  Here, a developer entered into a change order with a contractor to fix the collapsed wall of a retention pond.  The change order required the contractor to haul off collapsed material from the bottom of the pond.  To fix the wall, the contractor hauled collapsed material and stockpiled the material on lot #8 (owned by the developer).  The contractor reused suitable material in reconstructing the wall in addition to material it excavated from lot #8.  The unsuitable material the contractor did not use in reconstructing the wall was spread out and compacted on lot #8 versus being hauled offsite to a dumping site.

 

Years later, the developer discovered the unsuitable materials had been buried on lot #8 that required it to excavate and remove this material and refill with suitable material.  The developer then sued the contractor for the costs it incurred in remediating this issue.  The contractor moved for summary judgment arguing that lot #8 was never part of its scope of work and it reconstructed the wall of the retention pond pursuant to the change order.   Unfortunately, the change order did not specify whether the contractor was required to haul off unsuitable material to an offsite dumping facility or it was required to leave that material on lot #8.  In fact, it does not appear the change order even mentioned that the contractor was going to stockpile collapsed material on lot #8 and reuse suitable material in reconstructing the wall.   The owner’s position was that while the contractor could use lot #8 as a temporary storage area, the contractor was always required to haul off unsuitable material to an offsite dumping facility.  The contractor disagreed stating it was always going to leave unsuitable material on lot #8 that it could not reuse to reduce the costs associated with fixing the wall.  Yet, the change order did not address this issue and was ambiguous as to what the contractor’s scope of work consisted of relative to reconstructing the wall with stockpiled suitable material and what it was required to do with unsuitable material it did not reuse.

 

The Northern District maintained that the scope of work in the change order contained a latent ambiguity because the change order did not identify where the contractor was required to haul off the collapsed material and both the contractor and owner’s interpretation of this scope of work was plausible and reasonable.   The court’s opinion includes a good discussion about the difference between a patent ambiguity and a latent ambiguity:

 

Under Florida law, the interpretation of a contract is a matter of law for the court’s determination so long as the terms of the contract are unambiguous.  The existence of an ambiguity in a contract is also a matter of law.  There are two types of ambiguities that can exist in a contract: patent and latent.  A patent ambiguity is one that appears on the face of the contract.  A latent ambiguity, on the other hand, exists where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic / parol evidence creates a necessity for interpretation or a choice among two or more possible meanings.  If the ambiguity is patent, then parol evidence cannot be used to clarify the parties’ intent.  If the court finds, however, that there is a latent ambiguity in the contract, then parol evidence must be heard in order to explain the meaning of the ambiguous term.  After receiving parol evidence clarifying the latent ambiguity, if there is no genuine issue of material fact remaining, the court can resolve the ambiguity as a matter of law.  Where, however, the terms of the written instrument are disputed and reasonably susceptible to more than one construction, an issue of fact is presented as to the parties’ intent which cannot properly be resolved by summary judgment.”

Macky Bluffs Development Corp., supra, at *2 (internal citations and quotations omitted).

 

Had the parties clearly clarified the scope of work relating to how collapsed material was going to be stockpiled on lot #8 and reused and whether unsuitable material was going to be (a) hauled offsite or (b) left on lot #8, there probably would be no scope of work dispute.  But, because this issue was not truly defined, it presented an ambiguity that naturally resulted in a dispute when the developer needed to remove the unsuitable material on lot #8.  The key is to spend the effort to clearly articulate the scope of work, whether it is base contract work or change order work, to best support your argument when a scope of work dispute subsequently arises.

 

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.

 

 

 

REQUESTS FOR EQUITABLE ADJUSTMENT AND CONSTRUCTIVE CHANGES IN FEDERAL CONSTRUCTION PROJECTS

imagesFederal government construction contracts contain a changes clause.  The changes clause in fixed-price federal construction contracts is contained in F.A.R. 52.243-4 (set forth at the bottom of this posting).  This changes clause allows the government, through the contracting officer, to direct changes to the construction contract.  It also allows the prime contractor to request an equitable adjustment to its contract price associated with either a directed / formal change or a constructive change.

 

Formal / directed changes issued to the prime contractor by the government are easy to comprehend.  These typically are less likely to lead to a dispute because the government acknowledges increased costs are owed to the prime contractor through its issuance of a formal change order / directive.

 

A constructive change, on the other hand, oftentimes is what leads to a dispute if the government does not agree that it caused the contractor to incur increased costs to perform the contract. The United States Court of Federal Claims in CEMS, Inc. v. U.S., 59 Fed.Cl. 168 (Fed.Cl. 2003) contains a good discussion as to what constitutes a constructive change:

 

A constructive change generally arises where the Government, without more, expressly or impliedly orders the contractor to perform work that is not specified in the contract documents.  The constructive change doctrine provides recovery for contractors as the rationale for constructive changes involves the objective of persuading a contractor to continue to work pending resolution of any dispute involving the work at issue.

*** 

There are two basic components to the constructive change doctrine-the change component and the order/fault component.  The change component describes work outside of the scope of the contract, while the order/fault component describes the reason that the contractor performed the work.

***

A constructive change issue arises for work if the Government either expressly or impliedly ordered the work outside the scope of the contract, or if the Government otherwise caused the contractor to incur additional work….In any event, the Government must have directed the contractor to perform the additional work.  The work must not have been volunteered.”

CEMS, supra, at 203 (internal quotations and citations omitted).

 

It is the constructive change that typically leads to what is referred to as a request for equitable adjustment or REA.  An equitable adjustment compensates a prime contractor for the increased costs it incurs in performing the contract, whether due to additional work or delays caused by the government.  Morrison Knudsen Corp. v. Fireman’s Fund Ins. Co., 175 F.3d 1221, 1243-44 (10th Cir. 1999).   “Some equitable adjustments are for work added by formal change orders….Other equitable adjustments result from ‘constructive changes,’ which occur when the government does something to increase the contractor’s costs without issuing a formal change order.” Id at 1244.

 

 

For a prime contractor to receive an equitable adjustment under the changes clause, it bears the burden of proving liability, causation, and injury.  P.R. Burke Corp. v. U.S., 58 Fed.Cl. 549, 556 (Fed.Cl. 2003).   The prime contractor must “prove that the government somehow delayed, accelerated, augmented, or complicated the work, and thereby caused the contractor to incur specific additional costs.”  Morrison Knudsen Corp., 175 F.3d at 1244.  Stated differently, “[b]efore an equitable adjustment will be granted, plaintiffs [prime contractor] are required to demonstrate that: (1) increased costs arose from conditions materially different from what the contract documents indicated and that such conditions were reasonably unforeseeable based on all information available to the contractor; and (2) the changes in the requirements caused the increased costs.”  Sipco Services & Marine, Inc. v. U.S., 41 Fed.Cl. 196, 224 (Fed.Cl. 1998).

 

As a prime contractor, if you experience a constructive change (increased costs to perform your work), notify the government and request an equitable adjustment to the contract.  If you volunteer to do additional work than you may be impacting your ability to request an equitable adjustment for a constructive change.  It is all about knowing and understanding your rights under the contract so that, among other things, you can preserve your right to seek additional compensation / an equitable adjustment to your contract price.

 

 

 

52.243-4 Changes (JUN 2007)

(a) The Contracting Officer may, at any time, without notice to the sureties, if any, by written order designated or indicated to be a change order, make changes in the work within the general scope of the contract, including changes-

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished property or services; or

(4) Directing acceleration in the performance of the work.

(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation, or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided, that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the Contracting Officer shall be treated as a change under this clause or entitle the Contractor to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractor’s cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

(e) The Contractor must assert its right to an adjustment under this clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of proposal, unless this period is extended by the Government. The statement of proposal for adjustment may be included in the notice under paragraph (b) above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if asserted after final payment under this contract.

 

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.

PAY-WHEN-PAID AND THE PREVENTION OF PERFORMANCE DOCTRINE

UnknownThe pay-when-paid doctrine is a standard provision in subcontracts to shift the risk of the owner’s nonpayment to the subcontractor. The owner’s payment to the contractor is a condition precedent to the contractor’s payment to the subcontractor. However, if there is a payment bond in place, a surety in Florida cannot rely on this contractual defense to defeat a subcontractor’s claim. (Notably, in other jurisdictions, a surety can rely on this defense.) The pay-when-paid doctrine has been discussed numerous times in the following articles: http://www.floridaconstructionlegalupdates.com/pay-when-paid-provisions-and-payment-bonds/ and http://www.floridaconstructionlegalupdates.com/subcontractors-and-unjust-enrichment-claims/ and http://www.floridaconstructionlegalupdates.com/careful-drafting-of-pay-when-paid-provisions/.

 

Sometimes, there is not a payment bond in place and the subcontractor is forced to assert a direct claim against the contractor. Or, perhaps, the subcontractor may not have properly preserved its lien / bond rights and its best recourse is to assert a claim against the contractor. In this situation, the contractor will be able to rely on the pay-when-paid provision in its subcontract assuming it can prove that it was not paid for the subcontractor’s work that is the subject of the dispute. This defense, however, may not be absolute. There is a legal doctrine known as the prevention of performance” doctrine.

 

Florida law provides:

 

Under the doctrine of prevention of performance, one who prevents the happening of a condition precedent upon which his liability is made to depend, cannot avail himself of his own wrong and thereby be relieved of his responsibility to perform under the contract.” Florida Ins. Guar. Ass’n v. Somerset Homeowners Ass’n, Inc., 83 So.3d 850, 852, n.1 (Fla. 4th DCA 2011) (internal quotation omitted).

 

 

This doctrine really has not been analyzed in the context of a pay-when-paid defense under Florida case law. Yet, now and again, a case outside of Florida addresses interesting points that are worthy of discussion.

 

In Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000), the Fourth Circuit (interpreting Virginia law) analyzed the prevention of performance doctrine in the context of a contractor raising the pay-when-paid defense. In this case, the contractor entered into a contract to build a private toll road in Virginia. (The contractor was also an equity partner in the ownership group.) During the drafting of the prime contract, several design issues were referenced that would result in additional payment to the contractor. One of those issues was changing the thickness of the pavement subbase material. There was strong uncertainly over the initial pavement design and it was anticipated that the thickness of the pavement subbase material would change. The construction lenders wanted to contain construction costs and insisted on certainty in determining the costs. The lenders did not want to authorize a prime contract that did not provide this certainty and the draft prime contract with examples of additional costs the lenders may have to fund did not sit well with them. To appease the lenders, the owner and the contractor agreed to remove examples of design changes or issues that would result in increased construction costs. The owner and contractor further assured the lenders that they did not anticipate substantial changes in the work (such as a change in the pavement subbase thickness). Of course, what the contractor and owner assured the lenders was not really what they believed because they anticipated a design change regarding the thickness of the pavement subbase material. Thus, the owner and contractor entered into a side agreement that was not shared with the lenders concerning the design changes / issues that would result in increased costs to the contractor.

 

The contractor then hired subcontractors to perform scopes of work relative to the road construction. The subcontracts contained pay-when-paid provisions. The contractor did not advise the subcontractors that design changes such as a potential change in the thickness of the pavement subbase material were hidden from the lenders and that such a change would likely not be funded by the lenders. The contractor did not seem as concerned with this because it had pay-when-paid language shifting the risk of nonpayment to the subcontractors (although the contractor did have a payment bond in place). Naturally, there was a design change that changed the thickness of the pavement subbase material and this work was performed by the subcontractors. A payment dispute originated in arbitration involving the owner, contractor, and subcontractors regarding this additional work. The arbitrator ruled that the owner must pay the contractor for this additional work and the contractor, after receiving payment, must pay the subcontractors. The owner did not pay so the contractor never paid the subcontractors contending that the pay-when-paid language does not contractually require it to pay.

 

Since the arbitration award was never paid, the subcontractors filed suit in federal district court which was appealed to the Fourth Circuit. Among other issues discussed in the case, the Fourth Circuit analyzed whether the contractor was required to pay the subcontractors for the additional work associated with the pavement subbase thickness in light of the pay-when-paid provision. The Fourth Circuit found that the trial court correctly applied the prevention of performance doctrine to hold the contractor responsible for the payment of the additional work.  The Fourth Circuit agreed that the contractor could not rely on the pay-when-paid language in the subcontract because it was responsible for the non-payment or non-occurrence of the condition precedent (i.e., owner’s payment). Specifically, the contractor knew that the additional work would most likely need to be performed which is why this design change was called out in the draft prime agreement. However, because of lender issues, it removed this language from the final prime contract and assured the lenders that additional work was not anticipated. It then contemporaneously entered into a side agreement with the owner that was not shared with the lenders regarding the same anticipated additional work (that it assured the lenders it was not anticipating). The Fourth Circuit held:

 

The prevention [of performance] doctrine does not require proof that the condition would have occurred ‘but for’ the wrongful conduct of the promisor; instead it only requires that the conduct have ‘contributed materially’ to the non-occurrence of the condition.” Moore Brothers, 207 F.3d at 725.

 

 

imagesIt is easy to see how the facts in this case as presented by the Fourth Circuit warrant the application of the “prevent of performance” doctrine. It is uncertain from this case what the lenders would have done if construction costs were increased to specifically cover the highly anticipated design change to the pavement subbase thickness or why this change was not funded through any contingency funds / line item in the loan (perhaps there was none because the lenders insisted on certainty with the costs). It is also uncertain what the lenders would have done (or what they did) regarding the submission of these additional work costs since the parties could not dispute that the work was additional contractual work. And, it is uncertain why the contractor did not obtain bids for the additional work from the subcontractors before hiring them and try to negotiate perhaps a more palatable cost knowing this additional work was likely going to occur. Even though the contractor appeared to try to appease the lenders so this project could move forward, it knew funding for the additional work would be a huge concern and it was not up front with its subcontractors regarding this potential lack of funding. Had it been up front with the subcontractors, perhaps this risk could have been specifically accounted for in the subcontract through specific language or better pricing that could have been presented to the lenders.

 

Notwithstanding, in the event a contractor raises a pay-when-paid defense, a subcontractor may be able to rebut this defense by arguing the “prevention of performance” doctrine, that being that the contractor caused the very non-occurrence of the payment and, therefore, should not be entitled to rely on this defense. Although this argument seems like a tough hurdle for the subcontractor since not all facts will be as egregious as the facts in this case, the contractor should still take steps to eliminate this argument by showing that it took steps to obtain payment from the owner. Subcontractors, on the other hand, that may not have bond / lien rights or want to pursue substantial claims for additional work against the contractor, may want to rely on this argument in furtherance of trying to get around the expected pay-when-paid defense.

 

 

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.