Smith, Currie & Hancock LLP

COMMON SENSE CONTRACTING

Vol. 17, No. 1

At the request of The Associated General Contractors of America, Smith, Currie & Hancock designed and developed a matrix of state laws affecting the construction process for each of the 50 states, the District of Columbia and Puerto Rico. Utilizing a standard format, each matrix addresses legislation on topics of interest to the construction industry such as:

The matrix for each state or jurisdiction provides statutory citations and comments regarding these laws. The following is a modified sample of the matrix as contained in the AGC's DocuBuilder® Release 2.0.

In addition, each matrix includes information on legislative session calendars, links to state legislative search engines and free technical support through the AGC's DocuBuilder® Help Desk.

We were honored and appreciative when the AGC recognized Smith Currie's depth of experience implicit in its request that we undertake this extensive initial effort. In addition, we have agreed to provide periodic updates to the matrix for each state, the District of Columbia, and Puerto Rico to reflect legislative revisions affecting construction laws. We are confident that each state matrix can provide a basic resource tool for firms contemplating work outside of their home state or seeking a checklist on construction law topics in their home state.

This product is available electronically from the AGC to both members or non-members on a 1-year subscription service basis. To reduce the cost, a subscriber can obtain any one of four regions (Northeast, Southern, Midwest and Western) of 13 jurisdictions per region or the entire set of 52 jurisdictions. The annual subscription rates are:

	AGC Members	Non-Members
Each Region: Additional Region(s): All 4 Regions:	$ 95.00 $ 50.00 $195.00	$145.00 $75.00 $295.00

Understanding the research time needed to obtain the same information for even one state in a region, the pricing of this product reflects the AGC's interest in providing a service to the industry at a very nominal cost. To subscribe, contact 1-800-282-1423 or on-line at docubuilder.sales@agc.org.

Thomas J. Kelleher, Jr.
Managing Partner

When a contractor is terminated for default, the surety's options under the performance bond include:

However, is it possible for the surety to meet its performance bond obligations by tendering a new, bonded, contractor willing to complete the work at the original price? In a recent case, a Florida court held that such a "tender" did not cure the default. In School Board of Broward County v. The Great American Insurance Co., 807 So.2d 750 (Fla. App. 4th Dist. 2002), the Florida District Court of Appeal for the Fourth District ruled that a performance bond surety could not satisfy its bond obligations to the owner and escape further legal exposure by simply tendering a replacement contractor and surety, even where the replacement contractor agreed to complete the project at the original contract price.

In the Broward County case, the school board entered into a contract with Rockland Construction Company to construct a high school sports complex. Pursuant to the contract and Florida statutory requirements, The Great American Insurance Company issued a performance bond for the project on behalf of Rockland and for the benefit of the school board. The bond was conditioned upon Rockland fully performing its contract for the contract price. The key language in the bond stated as follows:

Before commencing the project, Rockland advised the school board of its inability to perform the contract. The school board declared Rockland's contract to be in default and made a demand on Great American to complete the project. Great American contacted another contractor who had also submitted a bid on the project. Great American offered to "tender" that contractor to enter into a new contract with the school board to complete the project for the same price as the Rockland agreement. The replacement contractor's performance would be "guaranteed" by a performance bond issued by another surety. This tender was conditioned upon Great American being completely released from its bond.

The school board declined the offer, refused to release Great American, and demanded that Great American complete the project by either "serving as the general contractor, handling disbursements of the School Board's money, or supervising (the replacement contractor's) work." Unable to reach agreement, the school board defaulted Great American and awarded the project to another contractor. The school board then sued Great American for breach of contract, contending that Great American's tender of a substitute contractor and surety in exchange for a complete release did not satisfy its performance bond obligations.

At the trial court level, the court granted summary judgment to the surety, holding that the surety had remedied the default by tendering a proposal to the owner that matched the requirements of the original contract. The Florida appellate court reversed, holding that Great American's offer did not "correct" Rockland's default under the performance bond. The school board was not required to accept the new contractor and surety in satisfaction of Great American's promise to "correct" Rockland's default. The school board was entitled to insist upon performance by Great American under the terms of that bond.

Great American was obviously seeking to avoid the potential continuing liability a surety faces when it enters into a takeover agreement with an owner. In this case, at least, the surety's understandable strategy did not work due to the specific language of the bond. For both owners and general contractors, as well as sureties, this decision illustrates the importance of fully understanding the significance of the precise language in each performance bond, as all bonds are not identical.

John E. Menechino, Jr.
404-582-8041
jemenechino@smithcurrie.com

Who is responsible for the extra costs incurred in performing work pursuant to an undisclosed proprietary specification. Solicitations for public contracts are regulated by statutes which generally require competition. These laws frequently prohibit or limit the use of proprietary specifications, which either list a brand name product or are written around a brand name product by describing its precise features and characteristics and leaving no choice other than to use the product. A recent Massachusetts decision allowed the contractor to recover the extra cost of using the undisclosed proprietary item and analyzed the state bidding statute which precluded use of a sole source specification. E. Amanti & Sons, Inc. v. R. C. Griffin, Inc., 578 N.E.2d 153 (Mass. App. 2001).

A contract was bid for an emergency vehicle exhaust system for a fire station pursuant to a Massachusetts statute requiring that specifications be written to provide full competition for each item of material to be furnished under the contract. The law stated that every contract was to provide that an item equal to that named or described in the specification could be furnished. The item would be considered equal if (1) it were equal in quality, durability, appearance, strength and design, (2) it would perform at least equally the function imposed by the general design, and (3) it performed substantially, even with deviations, to the detailed requirements of the item described in the specification. Lastly, the statute stated that for each item of material, the specifications were to provide either a minimum of three brand names of the material or a description of the material which could be met by a minimum of three sources.

After award, Amanti requested approval of an Emergency Vehicle Exhaust System produced by a different manufacturer. The architect denied the request stating that the proposed system did not meet the contract's performance requirements. The specific failures of the proposed "or equal" system were described and the subcontractor was instructed to re-submit a revised exhaust system which complied with the specifications. Amanti asked for the names and specific model numbers of two additional manufacturers that were acceptable as equivalent to the specified system. In response, the architect asserted that the specification was a "performance" type and the name of one manufacturer meeting those requirements was all that was necessary. Amanti then notified Griffin that it would furnish the PlymoVent system under protest and seek full compensation for the additional cost involved.

After completing the work., the subcontractor sued the prime who in turn claimed against the municipality. The trial court granted judgment to Amanti against Griffin and for Griffin against the municipality holding that the exhaust system was not a competitive performance specification because it could not be satisfied by any manufacturer other than PlymoVent. As a result, the municipality had a duty to disclose to bidders that PlymoVent was a sole source and that having failed to do so the municipality was liable for the damages, interest, and attorney's fees incurred by the subcontractor.

On appeal, the municipality contended that the state statute did not prohibit a specification from occupying the middle ground between a full competition performance specification and a specification that was proprietary. In addition, the municipality asserted that the PlymoVent system was not a sole source product because the specification did not limit the contractor to only one source but allowed substitution of an "equal" system. The appellate court affirmed the judgment and noted that the Massachusetts competitive bidding statute provided that the general rule is that all specifications must provide full competition except for those instances where there are sound reasons in the public interest to do otherwise. The court stated that the purpose of the statute is open and honest competition so that all participants equally compete on accurate information based either upon a listing of acceptable sources of materials to prepare a competitive bid or a clear statement that the specifications are proprietary. The court stated that the addition of the words "or equal" to the specification did not constitute a middle ground or otherwise satisfy the requirements of the competitive bidding statute.

Like this Massachusetts law, federal statutes require competition and limit the use of proprietary specs. For example, the Federal Acquisition Regulations prohibit a federal agency from using a proprietary specification merely because it wants a superior product which exceeds the government's minimum needs. As a result, federal agencies must draft specifications permitting the broadest competition while meeting the minimum needs reasonably required. Similarly, many other states have statutes which prohibit or limit the use of brand name or equal specifications. For example, California prohibits the use of proprietary specifications unless the specified product is intended to match products in use on other projects. When a brand name or equal specification is allowed, California law provides that two brand names must be specified along with the words "or equal." In New York, municipalities are required to follow certain procedures before they can specify brand name products. Likewise, Oregon prohibits the use of proprietary specifications unless the specified product is compatible with existing equipment, only one product has the quality required or a substantial cost savings could be achieved by using one particular product. Virginia allows brand names to be used for public building contracts but only as examples as the general style, type and quality of the product required by the contract.

Anyone performing work under contract with a public owner in Florida should be mindful of the doctrine of sovereign immunity prior to performing work outside the scope of a written contract or change order. One who performs extra work outside the scope of a contract without a written change order will be lucky to be paid for the extra work, as the doctrine of sovereign immunity appears to preclude recovery. Recent cases illustrate, however, that the doctrine of sovereign immunity does not preclude a claim for extra compensation for additional work that is either within the scope of the written contract and performed under protest or contained in a written change order and performed under protest.

In Florida that the defense of sovereign immunity will not protect the state from liability arising from the breach of an express, written contract in which a state entity has statutory authority to enter. See Pan-Am Tobacco Corp. v. Department of Corrections, 471 So. 2d 4 (Fla. 1984). The Florida Supreme Court, however, has held that without a written change order, the doctrine of sovereign immunity precludes recovery for the cost of extra work that is outside the express terms of a written contract and not an implied part of the written contract. See County of Brevard v. Miorelli Engineering, Inc., 703 So. 2d 1049 (Fla. 1997). Since Miorelli, several appellate courts have clarified the application of the defense of sovereign immunity by reversing summary judgments in favor of public owners being sued for breach of contract where the contractors sought extra compensation for additional or extra work done under protest.

In W&J Construction Corporation v. Fanning/Howey Associates, 741 So. 2d 582 (Fla. 5th DCA 1999), the contractor entered into a contract with the School Board of Brevard County for the construction of a school. The school board employed an architect to prepare specifications that included a fire protection system.

After work began, the contractor disagreed with the architect as to the scope of the fire protection system required by the contract documents. The contractor took the position that the architect's interpretation of the contract required the contractor to install an upgraded system involving changes to the contract requirements. The architect directed the contractor to install the system pursuant to the architect's interpretation of the contract. Pursuant to the terms of the contract, the contractor could not suspend performance of the project.

The contractor advised the architect that it would install the system pursuant to the architect's instructions under protest. The school board failed to issue a formal change order for the upgraded system, taking the position that it was within the scope of the original contract and specifications.

The contractor sued the school board, seeking to recover damages for having been required to furnish the disputed additional work on the fire protection system. The contractor argued that the school board breached its contract by failing to issue a formal written change order as called for by the contract documents, which would have permitted the contractor to recover compensation for the additional work required by the school board. The trial court entered summary judgment in favor of the school board based upon Miorelli.

The Fifth District reversed and held that the upgraded fire protection system was not "extra work performed 'outside' the contract." The W&J court stated that the issue is whether the original contract covered the work that the contractor claimed was "above and beyond that originally required by the contract." If the original contract covered the work, the contractor would obviously not be entitled to additional compensation. If the original contract did not cover the work, the contractor would be entitled to additional compensation on the ground that the owner required the contractor to perform the work, yet failed to issue a change order as it should have pursuant to the contract.

In C.O.B.A.D Construction Corp. v. School Board of Broward County, 765 So. 2d 844 (Fla. 4th DCA 2000), the contractor entered into a contract with the School Board of Broward County for the construction of a school. During construction, the contractor submitted requests for change orders for extra work. The school board granted the requests and issued change orders to the contractor. The contractor signed and returned the change orders, along with a cover letter that expressly stated that it disputed the price that the school board indicated was to be paid for the extra work and reserved its right to assert a future claim for extra compensation. The contractor performed the extra work.

In an action brought by a subcontractor against the contractor, the contractor filed a third-party complaint against the school for money owed to it and its subcontractor for work performed on the project. The contractor sought additional compensation for the work performed under protest pursuant to the change orders and additional compensation for extra work for which no change order was executed. The school board moved for partial summary judgment based on the doctrine of sovereign immunity. The trial court granted the motion on the ground that Miorelli "bars a contractor from seeking additional compensation from a state entity unless the extra work is memorialized in a written, executed change order … [and the contractor] could not unilaterally reserve its right to assert a future claim for extra compensation for work set forth in the contract or change orders."

Pursuant to the doctrine of sovereign immunity, the Fourth District affirmed the summary judgment concerning the contractor's claim for additional compensation for extra work that was not included in the contract or any written change order. Regarding the claim for additional compensation for extra work that was the subject of a change order, the court stated that, as in W&J, the contractor "could perform the work under protest and later bring suit to recover damages for having been required to perform the extra work for an inadequate price." The Fourth District thus reversed the trial court on this issue.

If you are a contractor, engineer or architect on a public project seeking payment for the performance of extra work, you must still be concerned about the sovereign immunity issues raised by the Morelli decision. The distinction between extra work "outside the scope of a contract" and "extra work" caused by a varying interpretation of the contract's requirement, is not always obvious. Seek a written change order before performing "extra work". If that request is denied, document that the public entity's position is based upon a conclusion that the contract's plans and specifications require the work which you consider to be extra. If you are not given a change order that includes (1) an adequate price for the direct costs of the extra work, (2) an adequate adjustment of contract time and/or (3) a reasonable price or reservation of your right to request indirect costs in the future, your options depend exclusively on the terms of the contract. If you are required by the contract to perform the work as directed, do so under written protest and notify the owner that you will be seeking additional compensation or contract time or both.

Daniel Te Young
850/878-3700
dtyoung@smithcurrie.com

The definition of "substantial completion" (sometimes called "substantial performance") has critical significance to owners, contractors, and subcontractors. Contracts often tie liquidated damages, reductions of retainage, issuance of punchlists, and insurance coverage to the substantial completion date. Bond rights or defenses may be tied to substantial completion. Courts in many states, such as Georgia, hold that statutes of limitations and statutes of repose for claims against contractors and subcontractors run from the date of substantial completion. Therefore, the definition of the elements needed to achieve substantial completion has significant financial implications. Recent decisions from Georgia and Connecticut point out that the definition of "substantial completion" can differ from state to state.

In Colormatch Exteriors, Inc. v. Hickey, 275 Ga. 249, 560 S.E.2d 496 (2002), the Georgia Supreme Court applied the definition of substantial completion spelled out in Georgia law. Georgia Code section 9-3-50(2) provides that substantial completion occurs when construction is sufficiently completed, in accordance with the contract as modified by any change order agreed to by the parties, so that the owner could occupy the project for the use for which it was intended. The court found that it is not necessary for a certificate of occupancy to be issued in order for substantial completion to occur. All that is required is that the owner "could occupy the project for the use for which it was intended."

Connecticut: Owner Occupancy Does Not Necessarily Establish Substantial Completion

In Pisani Construction, Inc. v. Adolf W. Krueger, 791 A.2d 634 (Conn. App. 2002), the Connecticut appellate court addressed whether owner occupancy established substantial performance. In that case, the contractor constructed a building which shared a common wall with an existing structure and the two structures were supposed to have the same height. However, shortly before completion, it was determined that the new building was approximately three inches higher than the existing building which meant the gutters and windows of the buildings did not align properly. The contractor sued to foreclose on a construction lien seeking payment of the contract balance. The owner had occupied the new structure. The contractor contended that the owner's occupancy of the new building established the contractor's substantial performance, and that the contractor was entitled to final payment because the owner's occupancy relieved the contractor of the need for further work. The owner contended that the contractor had breached its contract by failing to match the frames and walls that were supposed to match on the parallel structures.

The appellate court agreed with the owner and affirmed the trial court's finding that the use of the building was not enough to prove substantial completion. Rather, the court stated that the determination of substantial completion requires a review of all applicable facts and circumstances regarding performance. Those factors include the extent to which the owner has been deprived of the reasonably expected benefit of the contract and the likelihood that the contractor will cure the failure.

The court found that the contractor knew that the new building was to be added to an existing structure. Therefore, the contractor knew that the new building needed to match the height of the existing building, and the failure to meet that requirement prevented the contractor from achieving substantial completion of the project.

As the approaches applied by the Georgia and Connecticut courts demonstrate, the laws and court cases defining substantial completion vary from state to state, and are often fact specific. The Georgia court's approach is consistent with the definition in AIA documents. Courts in several other states have found substantial completion is the point at which the work is sufficiently complete for the owner to occupy or use the project for the purpose for which it was intended. See, for example, Meyer v. Bryson, 891 S.W.2d 223 (Tenn. App. 1994); J.M. Beeson Co. v. Sartori, 553 So. 2d 180 (FL. 4th DCA 1989).

However, some states have applied a percentage of completion test and found that if defective work affects a significant amount of the project work (in whatever amount the court or jury deems to be significant) then the project is not substantially complete. Carefree Building Products, Inc. v. Belina, 169 A.D.2d 956, 564 N.Y.S.2d 852 (N.Y. 3d Dept. 1991) (defects amounting to nearly 25 percent of the contract price prevented substantial completion). Also, if a contractor intentionally deviates from the contract requirements in a significant manner or the work does not comply with applicable codes, some courts and government boards have held that substantial completion was not achieved. See, for example, Sears-Brown Associates, P.C. v. Blackwatch Development Corp., 112 A.D.2d 765, 492 N.Y.S.2d 266 (N.Y. 1985); Batson-Cook of Atlanta, Inc., ASBCA No. 44902, 97-1 BCA 28,754.

While state law or cases may define substantial completion in the absence of a contract definition, the parties can define substantial completion in their contract terms. The parties can specify that occupancy establishes substantial completion. For example, AIA document G704-1992, Certificate of Substantial Completion, defines "substantial completion" as the stage of progress of the project work when the work or designated portion thereof is sufficiently complete in accordance with the contract documents so the owner can occupy or utilize the work for its intended use. However, owners often include contract provisions specifically stating that occupancy of the project does not constitute substantial completion. In such cases, it is important to both the owner and the contractor to specify in the contract the events that will constitute substantial completion. The failure to include such specific terms can lead to confusion, and the court may revert to the state law or cases interpreting substantial completion. The court may also find that the definition of substantial completion will be construed against the party drafting the contract.

The contract definition of "substantial completion" can have a major effect on the parties. For example, in Coastal Chemicals, Inc. v. Brown, 35 S.W.3d 90 (Texas App. Houston 2000), a Texas Court of Appeals addressed substantial completion, defined in the contract as the successful installation of the improvements. The definition did not define substantial completion as a fully operational facility. The contract also provided that the contractor would be entitled to an early completion bonus if the project was substantially completed within 18 months from a specific date. The contractor contended it had successfully installed the improvements by the deadline. The owner initially agreed but later refused to pay the bonus contending that latent defects in boilers prevented the use of the plant as intended. The court agreed with the contractor and awarded it the bonus. The court found that the owner had accepted the contractor's work as substantially complete and claims of defective workmanship did not invalidate substantial completion. Rather, the owner would have to rely on the contract warranty provisions.

If substantial completion is not defined in your contract then the parties need to determine how substantial completion is defined by the state laws or regulations applicable to the contract.

Gregg Joy
404/582-8033
sgjoy@smithcurrie.com

Many state entities are adopting procedures, either by legislation or regulation, making a contractor's past performance a critical factor in pre-award responsibility determinations. This process raises the question of whether repeated non-responsibility determinations equate to a de facto debarment. In Franbilt Inc. v. New York State Thruway Authority, 735 N.Y.S. 2d 675 (N.Y. App. Div. 2002), a New York appellate court held that they did not.

In Franbilt, a steel contractor ("claimant" or "Franbilt") who had performed work as a subcontractor on various projects for the State Thruway Authority ("Authority") over a period of ten years was notified by the Authority's chief engineer that it was disapproved as a subcontractor with regard to any further work on its current project. Franbilt was informed that it was immediately suspended from further work on all Authority projects pending review of its allegedly gross nonconformance with the plans and specifications of the current project. Thereafter, other general contractors, whose bids submitted for new proposed projects under the Authority's control listed the claimant as a proposed subcontractor, were informed, on a bid by bid basis, that the Authority considered the claimant not to be a responsible supplier/subcontractor for that proposed project. The Authority offered to meet with Franbilt and the contractor prior to any final responsibility determination. Ultimately, Franbilt was not awarded any of the subcontracts.

The claimant subsequently filed suit alleging that the Authority's conduct subjected it to a "de facto debarment" and violated its right to due process which irreparably damaged the company's reputation as a responsible bidder.

After noting the Authority's statutory duty to award contracts to the lowest responsible bidder, the court held that the claimant was not deprived of due process and a liberty interest by the Authority's "de facto debarment." The Authority not only submitted evidentiary proof supporting a rational basis for its determination of the claimant's "non-responsibility," but Franbilt had available to it mechanisms to challenge the Authority's responsibility determination on each bid. The claimant was afforded an opportunity to present explanations for the Authority's areas of ongoing concern prior to any final responsibility determination and, if still dissatisfied, to commence a further proceeding to challenge the Authority's ultimate responsibility determination. As a result, the court found no merit to Franbilt's "de facto debarment" claim.

A state entity or administrative agency's authority to reject bids made by irresponsible bidders does not necessarily imply the right to bar a contractor from receiving awards of future projects or from participating in future contracts. An administrative agency has only those powers conferred upon it by the legislature and such other powers as are incidental thereto or necessarily implied therefrom. Callanan Industries, Inc. v. White, 503 N.Y.S.2d 930, 932-933 (N.Y. App. Div. 1986).

A bidder's history of dishonest work practices and inadequate performance of public works contracts has formed a rational basis for a city board to determine that the bidder was not the lowest responsible bidder on a roofing contract. Mid-State Industries Ltd. v. City of Cohoes, 633 N.Y.S.2d 238 (N.Y. App. Div. 1995).

The minimum requirements of due process are notice and an opportunity for hearing appropriate to the nature of the case. Boddie v. Connecticut, 401 U.S. 371 (1971). In Romano Enterprises of New York, Inc. v. New York City Department of Transportation, 679 N.Y.S.2d 58 (N.Y. App. Div. 1998), the court held that a company was not deprived of any due process rights by the New York City Department of Transportation's determination of non-responsibility since the non-responsibility determination was made only after the company was afforded an opportunity to present arguments in person and in writing. In a similar vein, a Florida court in D.A.B. Constructors, Inc. v. State of Florida Department of Transportation, 656 So.2d 940 (Fla. Dist. Ct. App. 1995) held that even though the contractor was alleged to be delinquent on a state project, the allegation could not be used to reject its bids on a project where an administrative proceeding had not yet been concluded.

The court's decision in Franbilt suggests that a state or administrative agency's repeated non-responsibility determinations may not amount to a "de facto debarment" when the contractor is afforded an opportunity to present an explanation for the agency's areas of ongoing concern prior to any final responsibility determination. Such an opportunity for a contractor to present information or argument in person, in writing, or through representation in opposition to a suspension or debarment, when coupled with proper notice, will likely survive a due process challenge.

Mark Farrell
404/582-8040
mefarrell@smithcurrie.com

Three recent cases, two from the Armed Services Board of Contract Appeals and one from the United States Court of Federal Claims, shed light on government contractor's ongoing struggle to obtain compensation for unabsorbed home office overhead.

Delays to a construction project can cause a contractor two distinct types of overhead damages. First, extending the project performance period can increase the cost of supervision and other time related general conditions costs incurred at the project site. This is typically referred to as "extended field overhead." Second, extending the project performance period can prevent a contractor from taking on new work and, thereby, reduce the contractor's overall income for the extended performance period. If the contractor's income is reduced, it has less money to pay or "absorb" its home office overhead costs. This is typically referred to as "unabsorbed home office overhead."

Extended field overhead costs can generally be determined from a contractor's project cost reports. The cost of unabsorbed home office overhead is more difficult to calculate. Over the last 40 years the boards of contract appeals and Federal Circuit Court of Appeals have developed the Eichleay Formula as a equitable method of calculating unabsorbed home office overhead. The Eichleay Formula, which takes its name from an Armed Services Board of Contract Appeals case, Eichleay Corp., ASBCA No. 5183, 60-2 ASBCA 2688, multiplies the contractor's allowable home office overhead for the contract period by the ratio of total billings for the delayed contract to the contractor's total billings for the contract period to determine the home office overhead allocable to the delayed contract. This overhead number is divided by total performance days to obtain a daily overhead rate. This daily rate multiplied by the total days of compensable delay is the amount of unabsorbed home office overhead.

While the Eichleay Formula has not changed in 40 years, the government has frequently argued that a contractor is not entitled to use the Eichleay Formula because it was not prevented from obtaining new work with which to absorb its home office overhead. This litigation has caused the Federal Circuit Court of Appeals to establish a clearly defined, two-step process for all Eichleay claims.

First the contractor must prove that the government caused the contractor to stand by during a government caused delay of indefinite duration. Melka Marine, Inc. v. United States, 187 F.3d 1370, 1375 (Fed. Cir. 1999). To meet this requirement, the contractor must prove (1) that its work was either suspended or significantly interrupted by a government caused delay and (2) that it was required to have its work force and equipment prepared to return to the project on short notice without knowing when the problem causing the delay would be resolved. Interstate General Government Contractors, Inv. v. West, 12 F.3d 1053 (Fed. Cir. 1993).

If the contractor satisfies this basic stand by test due, the burden of proof shifts to the government to show either (1) that it was not impractical for the contractor to obtain replacement work during the delay, or (2) that the contractor's inability to obtain replacement work was not caused by the government.

In Roy McGinnis & Co, Inc., ASBCA No. 49867, 02-1 BCA 31,720, the board found that the contractor had met the stand by requirement. This case arose out of a contract at Kelly Air Force Base, San Antonio, Texas, to (1) convert an existing hangar to an x-ray facility, (2) build a new testing laboratory and demolish an existing storage facility and (3) renovate an existing avionics facility. Each task had a separate schedule, a different completion date and different liquidated damages.

Shortly after the contractor began work it discovered severe problems with the location of utilities. Many utilities were not located as shown on the drawings. Some utilities shown on the drawings did not exist. Other utilities were discovered that were not shown on any drawing. The problems forced the government redesign the entire utility relocation. The government and the contractor agreed that this problem delayed the project for 110 days and that the delays were of uncertain duration.

After encountering the utility problems, the contractor performed whatever work it could in order to minimize its damages. The contractor's president testified before the ASBCA that this work reduced the impact of the government's delay from 150 to 110 days. At the conclusion of the delay the contractor and the government negotiated an agreement covering all direct costs of the delay, including extended field overhead. However, the government rejected the claim for home office overhead.

At trial the government argued that the contractor had not been required to stand by because the contractor's work was not significantly interrupted. The government based this argument on evidence that contractor had successfully moved his crews to other work and had managed to earn nearly 100 percent of what it had planned to make during the delay period.

The ASBCA found that the delay to the contractor's work was a significant work interruption even though the contractor had been able to redeploy its work force during the delay. The board noted the Federal Circuits ruling in Interstate, supra that application of the Eichleay Formula does not require an idle work force.

Practice Note: This is an good case for contractors. It appears from the text of the case that the utility relocation redesign did not require extra work for which the contractor received significant compensation. If there had been compensation for extra work, the government would likely have argued that the change itself was additional work and that revenue from the offset any loss of income from other work.

In Charles G. Williams Construction, Inc., ASBCA No. 49775, 02-1 BCA 31,833, the board applied the same law applied in McGinnis, but found that the contractor had not been required to stand by. The case arose from a contract to renovate a building at an Army Medical Center in Colorado. The work was to be done in two phases. During each phase, the government was obligated to vacate the affected part of the building while that phase was under construction.

Problems with defective government specifications and contractor caused problems both delayed completion of phase one. This delayed the completion of phase one and the start of phase two. During this time, the government issued a large number of change orders, many of which increased the contract price. The government then failed to vacate the phase two work area which further substantially delayed the contractor's work. Ultimately, the government terminated for convenience the completion of phase two.

The contractor filed a claim for delay costs. The board allowed certain parts of the contractor's claim, but denied its claim for unabsorbed home office overhead. The board based its decision on the government auditor's finding that the contractor's home office overhead for the delay period was fully absorbed by increased income from contract modifications. The contractor appealed the board's decision to the Federal Circuit which reversed because the board had not discussed the two-step stand by test described above.

On remand the board again denied the contractor's claim. The board found that the contractor had presented no evidence that its forces had been required to stand by. The contractor's representative had testified that, to his knowledge, the only prerequisite to an Eichleay Formula recovery was a Government caused delay. Accordingly, the board held that the contractor had failed to carry its burden of proving that it had been required to stand by. The board noted that the auditor's finding that the contractor's home office overhead had been absorbed by additional income from change orders further indicated that the contractor had not been required to stand by. Since the contractor did not prove stand by, the board did not address the question of whether the contractor had been able to obtain additional work.

Practice Note: To pursue an Eichleay Formula claim, it is essential to be fully versed in the latest requirements set out by the various boards and the Federal Circuit Court of Appeals. As noted above, extra income from change orders can be a significant problem for an Eicheay Formula claim. Nevertheless, it certainly possible that the contractor could have proven a period of stand by if it had been prepared to do so. That would have shifted the burden of proof to the government, and significantly improved the contractor's chances of obtaining a recovery.

In Nicon, Inc. v. United States, 51 Fed. Cl. 324 (2001), the United States Court of Federal Claims refused to apply the Eichleay Formula to a delay claim even though it was evident that the contractor had been required to stand by. The contractor was awarded a contract to perform repair work at MacDill Air Force Base in Florida. Following an unsuccessful bid protest, the Corps of Engineers never issued a notice to proceed. Finally, eight-and-a-half months after contract award, the Corps issued a termination for convenience. The Corps agreed to pay all direct costs incurred by the contractor, but refused to pay home office overhead.

On appeal the court denied the contractor's Eichleay Claim even though it was evident that the contractor had been required to stand by. The court found that it could not apply the Eichleay Formula because the contractor had received no revenue, and the formula required overhead to be allocated based on revenue. The court further found that, while it was sympathetic to the contractor's claim, Federal Circuit authority precluded it from modifying the Eichleay Formula or using any substitute formula.

Practice Note: Hopefully, the contractor appeals this case to the Federal Circuit. This decision by the Court of Federal Claims appears to ignore the accepted principle that once damages are proven they need not be calculated exactly.. The Eichleay Formula has always been recognized as a simple way to estimate damages that can rarely be exactly calculated when delays impact on-going performance. The court's failure to award damages in this case, using a reasonable modification of the Eichleay Formula, appears to have been a victory of form over substance.

Charles W. Surasky
404/582-8022
cwsurasky@smithcurrie.com

Historically disliked by trial courts, the total cost method of measuring damages is engineering a resurgence. Two recent decisions from diverse jurisdictions, the South Dakota Supreme Court and the United States Court of Federal Claims, make it clear that if no better means of proving damages exists, trial courts should accept the total cost method, or modified total cost method, of proving damages.

In order to substantiate damages under the total cost method, a party must establish: (1) the impracticability of proving actual losses directly; (2) the reasonableness of its bid; (3) the reasonableness of its actual costs; and (4) lack of responsibility for the added costs. The modified total cost method allows a court to adjust a claim when a contractor's initial bid is found unreasonable by substituting a reasonable bid amount into the calculations. Additionally, if the claimant is determined to have been partially responsible for the additional costs, the court can, likewise, adjust those costs downward. However, both types of total cost claims, modified or not, similar to the jury verdict method, are not favored and should only be resorted to when actual costs cannot be determined.

In Baldi Bros. Constructors v. United States, 50 Fed. Cl. 74 (2001) which was tried before the United States Court of Federal Claims, the contractor had been awarded a contract by the Department of the Navy to construct a training range project at Camp Lejeune, North Carolina. Essentially, the project involved the construction of a live-fire training facility for M-1 tanks. The contractor performed a site visit to Camp Lejeune but was unable to physically examine the work area because of dense and extensive vegetation. In preparing its bid, the contractor relied mainly on the plans and the contract documents. The vast majority of the work involved earthwork. In preparing its bid, the contractor considered the type of soil, the grade of the project site, the amount of dirt to be cut and filled, and distance between the areas to be cut and filled. The boring logs accompanying the bid documents represented the soils underlying the site as well-graded silty/sand, which is suitable for excavation using conventional earthmoving equipment. The topographic map showed the project site as very flat. According to the project plans, the north and south tank trails to be constructed ran parallel to each other with connections only at one end. The tank trails required cutting of dirt, while the targets required fill soil.

Since the contract documents and the plans contained no prohibitions to the contrary, the contractor anticipated that its equipment could utilize the shortest route between the service road and the target construction sites. Thus, the contractor's earthwork estimate anticipated that the dirt would be suitable for cutting and filling on-site and that the earthmoving equipment could move rapidly through the area. There was no contractual requirement to import fill materials from off-site. The contract initially required the contractor to complete its work within 550 calendar days. At the parties' first partnering meeting prior to construction, the Navy announced to the contractor that some "wetland issues" needed to be addressed. The Navy then instructed the contractor not to remove trees from any wetlands nor to drag through the wetlands the trees removed from areas to be cut and filled. The contractor was then told it could not operate its heavy equipment within the wetlands or outside the limits of the tank trail, service road and access road, contrary to its original plans. Ultimately, the contractor learned that approximately 80% of the site upon which it was working was "untouchable wetlands areas."

In addition to the wetlands problem, during the course of construction, the contractor encountered various subsurface conditions that it did not expect, including saturated peat marsh, super-saturated clays, subsurface water and other unsuitable soil types. The soils were not the conditions depicted on the boring logs incorporated into the contract. The contractor timely notified the Navy that it believed it had encountered differing site conditions. However, the Navy refused to recognize the differing site conditions claims. The differing site conditions required the contractor to modify its sequence of work and made it impossible for the contractor to employ the conventional earthmoving scrapers it had intended to use to perform the cut and fill work.

Throughout the course of performance, the contractor was directed to stop work on a number of occasions and provide additional services including more site de-watering, stockpiling and drying out of unsuitable soil materials and additional trenching and drainage improvements. Additionally, throughout performance the Navy ordered the contractor to stop work on a number of occasions while issues related to the tank trail design were resolved. Ultimately, the contractor completed its work and submitted a substantial claim to the Navy, which was subsequently denied by the contracting officer.

At trial, Baldi Bros. used the total cost method of calculating damages due to the "massive and continuous changes to the earthwork activities on the project" which made it unable for the contractor to discreetly track the actual increased costs of performance. The court had little trouble finding that the contractor had easily satisfied two of the four requirements for the use of the total cost method: the impracticability of proving actual losses directly and the contractor's lack of responsibility for the added costs. In its decision the court stated that "The designation of a large portion of the construction site as wetlands was the equivalent of the 800-pound gorilla landing on plaintiff's plans for performing the contract." Additionally, the court found that, ". . . due to the snowball effect of the wetlands on the project plans, it would be easier for plaintiff to identify the items of contract performance that proceeded as planned, rather than the difference in costs between all aspects of the original plan and the work as the deviations occasioned."

With respect to the contractor's responsibility for any of the additional costs that it had encountered, the court found that the wetlands problem affected the entire project site and that the conditions were exacerbated by natural causes such as heavy rain. The contractor maintained that the delays and the increased costs from the rain did not preclude the compensation for the differing site condition. The general rule is that the risk of severe weather in a particular region is not shifted to the government through the Differing Site Conditions clause. However, where, as here, severe weather interacting with an undisclosed property of the construction site delayed the contractor, the court found that the Navy was responsible.

The question of the reasonableness of the bid by Baldi Bros. did draw close scrutiny from the court. Ultimately, the court determined that while there was nothing wrong with Baldi Bros. using the Caterpillar Performance Handbook in order to obtain production rates for the scrapers it had intended to use, the contractor should not have chosen the most efficient production rate from among those available in the Handbook. Rather, the court found, the next less efficient production rate should have been used by the contractor, and on that basis, the court recalculated the contractor's bid and adjusted the contractor's claim downward by the amount of the increased bid. The court reasoned that the most efficient production rate was inappropriate because the contractor had not worked in the North Carolina area before and should have known that the conditions in the handbook which warranted the most efficient production rate were not those that were going to be encountered at Camp Lejeune.

In Rodney W. McKie v. Ron Huntley, 620 N.W. 2d 599 (S.D. 2000), a contractor had appealed a lower court's rejection of its claimed damages on the basis that a total cost method of calculation was too speculative. The damages arose from problems encountered during construction and included inadequate access to the project site, improper excavation, difficulty in obtaining necessary elevations and dimensions and numerous changes to the plans. These problems, in turn, resulted in delays and additional costs for which the contractor sought recovery. In reversing the lower court, the South Dakota Supreme Court distinguished between the difficulty in computing damages and the requirement of proving damages as an essential element for recovery. The court pointed out that once the existence of damages has been shown by a preponderance of the evidence, a claimant must produce only the best evidence available to allow the trier of fact a reasonable basis for calculating the damages. In that regard, the court concluded that once liability was established by a preponderance of the evidence, the total cost method of calculating damages could be appropriate for those disputes where is difficult or impractical to quantify losses from changed conditions. The decision noted that sometimes it was impossible to assign a precise monetary loss to each discreet event in a project where continuing problems compounded a contractor's performance difficulties. The court's decision stated, "Although the 'total cost' method must be used with caution, the method should be applied where the nature of the particular loss has made it impossible or highly impracticable to determine damages with a reasonable degree of accuracy and where the loss is substantiated by reliable evidence."

Both decisions discussed above emphasize that trial courts must use caution when allowing a claimant to prove its damages using the total cost method. However, they both likewise recognize that there are instances when the total cost method or the modified total cost method are the only reasonable means of calculating a claimant's damages.

John T. Flynn
404/582-8024
jtflynn@smithcurrie.com

Newsletters

Smith, Currie & Hancock LLP

COMMON SENSE CONTRACTING