THE RISK OF A FIXED PRICE CONTRACT IS THE MARKET

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.

 

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