Tag Archives: fixed price contract

DELAYS AND SUSPENSION OF THE WORK UNDER FIXED PRICE GOVERNMENT CONTRACT

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Here is an interesting fact pattern and case decided by the Civilian Board of Contract Appeals dealing with (1) force majeure type events and epidemics (Covid-19); (2) suspension of the work; and (3) delays. These are three topics important to all contractors including federal contractors.

In Lusk Mechanical Contractors, Inc. v General Services Administration, 2024 WL 1953697, CBCA 7759 (CBCA 2024), a contractor entered into a fixed price contract with the government to repair, replace, and modernize site and building systems at a federal building. The contractor commenced work right before Covid-19.  When Covid-19 hit, the government issued the contractor a two-week suspension of work notice on March 27, 2020. The suspension of work allowed off-site administrative work to continue but suspended on-site physical work.  The government extended the suspension of work three more times. The contractor could resume work on the exterior on June 1, 2020, but was not permitted to resume work on the interior until July 20, 2020.  On the same date that the contractor was able to commence interior work, it submitted a modification for delay caused by the suspension – 64 days for the time period the entire site shutdown, and 51 days for the interior work shutdown.

The contracting officer responded stating that under FAR Clause (FAR 52.249.10) dealing with fixed priced contracts, epidemics (such as Covid-19) that impact the critical path will entitle the contractor to a no-cost extension of time and the government grants the contractor a 66-day extension of time. The contractor was also seeking compensation, so it then certified its claim seeking an equitable adjustment in its compensation based on FARS’ suspension of work clause – FAR 52.242-14.

First, because the contractor entered into a fixed price contract, it assumed the monetary risk of delays caused by Covid-19:

It is “well-established that ‘a contractor with a fixed price contract assumes the risk of unexpected costs not attributable to the Government.”’ Absent a special adjustment clause, this Board has held that an unforeseen pandemic does not shift the risk to the Government for any unexpected costs incurred under a firm, fixed-price contract. Here, there is no such adjustment clause in the contract. “FAR clause 52.249-10 explicitly addresses how acts of God, epidemics, and quarantine restrictions are to be treated. A contractor is entitled to additional time but not additional costs.” 

Lusk Mechanical Contractors, supra (internal citations omitted).

Second, regarding the suspension of work argument under FAR 52.242-14:

[A] contractor may recover an equitable adjustment from the Government if the contractor shows that ‘(1) contract performance was delayed; (2) the Government directly caused the delay; (3) the delay was for an unreasonable period of time; and (4) the delay injured the contractor in the form of additional expense or loss.”  [The contractor] has not established that [the government’s] successive suspensions were the sole cause of the delay or that the work was delayed for an unreasonable period of time.

[The government] suspended [the contractor’s] construction on the exterior and interior portions of the project from March 27 to June 1, 2020, for a total of sixty-six days. [The contractor] contends that [the government’s] suspension of work directives were the sole cause of the delay. We disagree. The executive orders issued by the Governor, at least in part, caused [the government] to suspend [the contractor’s] work.

A contractor may only recover under the Suspension of Work clause “when the Government’s actions are the sole proximate cause for the contractor’s additional loss, and the contractor would not have been delayed for any other reason during that period.”  The stay-at-home order issued by the Governor…in March 2020 equally interfered with [the contractor’s] performance of the work because there was no stay-at-home exemption for construction work that was not a “core life service” or maintained “the safety, sanitation, and essential operation to properties and other essential businesses.”

***

Even had [the government] been the sole cause of delay, the length of the suspension period was reasonable (based on Covid-19), precluding recovery by [the contractor].

Lusk Mechanical Contractors, supra (internal citations omitted).

Third, as it related to the additional delay to the interior work, that additional suspension also was not unreasonable. The contractor had been able to resume exterior work earlier, and its administrative work was never suspended. And, the contractor never proved that the suspension of work to the interior work impacted its critical path:

Because [the contractor] resumed work on the exterior portion of the project much earlier and the administrative work was never suspended, [the contractor] had to prove that the interior work was on the critical path of the project during the additional suspension period. [The contractor], however, has not established, or even asserted, that the interior work was on the critical path of the project. When establishing a Government-caused delay, the contractor bears the burden of proving that the delay affected the critical path of the project. “‘The reason that the determination of the critical path is crucial to the calculation of delay damages is that only construction work on the critical path  had an impact upon the time in which the project was completed.”’  Here, [the contractor] provides no proof that the interior work was on the project’s critical path. Therefore, [the contractor] is not eligible for delay damages for the suspension of the interior work through July 20, 2020.

Lusk Mechanical Contractors, supra (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.

THE RISK OF A FIXED PRICE CONTRACT IS THE MARKET

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When performing work on a fixed price or unit, there is risk that is being assumed on your end.  One risk is the market.  You are ultimately banking on the fact that the market is not going to make your fixed prices unprofitable.  That’s not an unforeseeable occurrence because the market shifts and that shift can have a negative ripple effect.

In a recent case out of the Federal Circuit, U.S. Aeroteam, Inc. v. U.S., 2022 WL 243176 (Fed.Cir. 2022), this market risk played a role in a fixed price contract. Here, a contractor was hired by the federal government to produce ground support trailers. A key component of these trailers was a running gear.  The contractor relied on a vendor for these running gears. Due to financial difficulties, the vendor had to raise its unit price for the running gears.  Based on the increased price, the contractor elected to manufacture the running gears itself. The contractor asked the government if this was ok and the government approved the request.  Once the contractor started manufacturing these running gears, it had an “awe” moment – the manufacturing costs were higher than anticipated.  The contractor submitted a request for equitable adjustment which the government denied.  The Contractor than sued the government raising three arguments to support its entitlement to additional costs: (1) constructive change; (2) cardinal change; and (3) commercial impracticability.  The contractor lost on all arguments.  It probably should have lost on all arguments.

Constructive Change

“To demonstrate a constructive change, a contractor must show (1) that it performed work beyond the contract requirements, and (2) that the additional work was ordered, expressly or impliedly, by the government.” Aeroteam, supra, at *2 (internal citations and quotation omitted).

The problem with this argument was that the government did NOT order the contractor to manufacture the running gears.  It merely approved the contractor’s request. The contractor made the decision since it thought it could manufacture the running gears when its vendor increased the unit price. An approval of a request, is NOT an order.  Aeroteam, supra, at *3.

Cardinal Change

A cardinal change, discussed in prior postings, “is so profound that it is not redressable under the contract, and thus renders the government in breach.” Aeroteam, supra, at *3.

The problem with this argument was there was no alteration in the contractor’s contract.  The contractor chose to manufacture the running gears and it was not forced to do this by the government.

Commercial Impracticability

“To prove commercial impracticability, a contractor must show that because of unforeseen events, [the contract] can be performed only at an excessive and unreasonable cost or all means of performance are commercially senseless.” Aeroteam, supra, at *4 (internal citations and quotation omitted).

The problem with this argument was that the contractor could have used its vendor to manufacture the running gears at a higher unit cost.  The contractor did not want to pay the higher unit cost. Moreover, there was no evidence that the higher unit price was even excessive. In this regard, the Court expressed that an increase in market price of the running gears is the risk the contractor assumed in a fixed price 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.