IS THE REMOVAL AND REPLACEMENT OF NONCONFORMING WORK ECONOMICALLY WASTEFUL?

There are times a contractor installs the wrong material or system contrary to the plans and specifications.  A nonconformity. The owner wants the already-installed material or system to be replaced in conformity with the plans and specifications.  However, what was installed is functionally equivalent to what the plans and specifications required and would be cost prohibitive, i.e., economically wasteful. If the contractor elects to remove and replace the nonconforming work, it may seek a change order because it is economically wasteful. Or, the contractor may refuse (typically, not the best approach) in furtherance of taking on the fight based on the economic wastefulness associated with the removal and replacement. A recent case, David Boland, Inc. v. U.S., 2022 WL 3440349 (Fed.Cl. 2022), talks about this exaction situation and the economic waste doctrine. This is an important doctrine for contractors to understand when faced with a similar predicament.

Here, a contractor was hired by the government to construct a wastewater collection system that was to be owned and operated by a private company. The contractor’s work was going to be incorporated into a larger sewer system that the private company already operated.  The contractor was required to install sewer manholes reinforced with steel in accordance with an ASTM standard. The manholes could be rejected if they did not conform to the ASTM standard.  Compliance with this ASTM standard was also required by the private company’s construction protocol for the infrastructure, which was incorporated into the contractor’s contract with the government. The contractor was required to strictly comply with the contract.

As it turned out, the contractor did not install sewer manholes reinforced with steel.  Instead, nineteen installed manholes were reinforced with synthetic fiber. The contractor requested a variance from the government suggesting certain guarantees and fixes.  They were not accepted by the government or private company. The government directed the contractor to remove and replace the manholes reinforced with fiber instead of steel. The contractor did so at the cost of $3.5 Million and sought its costs from the government under the economic waste doctrine.

The contractor claims when it sought its variance it provided an expert opinion that the “fiber-reinforced manhole sections could be expected to serve their purposes as well as steel-reinforced ones.” David Boland, supra at *3.  The government, through an expert, opined that fiber-reinforced manholes were more likely to have undetected defects that could reduce the manholes’ service life.  The private company also did not accept the fiber-reinforced manholes and there was an issue as to whether guarantees offered by the contractor were equivalent to assurances the private company was to receive from the government.  In other words, there was a dispute as to the functional equivalence of fiber-reinforced versus steel-reinforced manholes.

Whether the contractor would be entitled to the removal and replacement costs hinges on whether such work was economically wasteful.  While this determination would be through the trier of fact on a later date, the Court’s discussion of the economic waste doctrine is a worthwhile discussion for consideration where the issue was whether the $3.5 Million to remove and replace nineteen fiber-reinforced manholes with steel-reinforced manholes was economically wasteful.

A contractor can recover correction costs under the economic waste doctrine when two elements are met: “[1] [T]he cost of correction is economically wasteful and [2] the work is otherwise adequate for its intended purpose.”  When those elements are met, the government may obtain a downward adjustment of the contract price, but it is liable for net correction costs if it orders replacement of the contractor’s work.

As to the first element, a cost of correction is “economically wasteful” when it is disproportionate to the loss of value that resulted from noncompliance.  As to the second, work is “adequate for its intended purpose” when it “substantially complie[s]” with contractual specifications.  A contractor’s performance can be substantially adequate when it “departs in minor respects from that which ha[s] been promised,” but not where it is “fundamentally less than [what the parties] had … bargained for.”  Substantial compliance is a factual question that “depend[s] in large measure upon the character and extent of the partial failure — upon its relative importance to the party affected by it.” 

The underlying substance of the test is less complicated than it might seem. Both elements depend on comparing the value of the contractor’s actual performance with the performance the contract would have strictly required. The burden is on the contractor to prove that its rejected work (or proposed correction) substantially complied with the contract. 

Two aspects of the economic waste doctrine deserve emphasis. First, the doctrine applies even where — as here — the contract calls for strict performance.  As the Granite Construction court explained, although the government “generally has the right to insist on performance in strict compliance with the contract specifications and may require a contractor  to correct nonconforming work[,] … the government should not be permitted to direct the replacement of work in situations where” the economic waste doctrine applies. 

Second, when resolving factual questions about the adequacy of a contractor’s original nonconforming work, a court should look to all the evidence developed in litigation, not just the information available to the government at the time it ordered the work to be corrected. 

David Boland, supra, at *4 (internal citations omitted).

 

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.

 

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