A poll of what NUCA members wanted to know more about (which we conducted when Utility Contractor invited us to submit this article) revealed a surprising fact: NUCA members want information on more effective use of contracts to avoid financial loss and improve job profitability.
NUCA companies, by and large, are well-versed in the importance of understanding contract terms and conditions before signing. They generally recognize that contracts signed before the job starts can play a vital role in shaping how a job proceeds and ends. Most are particularly careful to vet and understand the contracts at project outset so that the job will run as smoothly as possible.
Some companies have developed a checklist of “must have” and “never include” provisions. They follow it to make sure that they have reviewed key contract language to ensure that it is complete, that there are no missing terms or attachments and that they find the language acceptable or know what they want to negotiate. And many, if not most, have put in place procedures that ensure that company representatives never sign a contract without first determining whether and how it addresses six key considerations:
Nevertheless, NUCA members report that some of their biggest issues arise after the contract negotiation stage. The problems described fall within several general categories: lack of systematic, disciplined document review during performance; inadequate management of administrative deadlines and obligations; and inadequate written communications. All three point to a disconnect between the contract words and a company’s understanding as to how the words can be used create tools to prevent loss and improve performance and, ultimately, profitability.
Lack of Systematic, Disciplined Document Review
Without a single point of contact responsible for assembly and careful review of all project-related correspondence and documentation, inconsistent information (received and given) may give rise to material misunderstandings among the parties. The parties may begin to act in ways that are outside the contract and may even vary the contract terms. The effect of this is compounded when gaps in project records go unnoticed and thus parties are left without the information needed to reach a speedy resolution.
A recent case offers a good example of how much this can matter. Strand Hunt Construction Inc. (SHC) proposed to construct a Joint Security Forces Complex in Alaska. In the proposal, Strand Hunt targeted project completion for 570 days (less than the more than 600 days identified in the solicitation) and had a goal of completing the contract on July 1, 2005.
The actual contract completion date should have been Sept. 23, 2005. SHC would have saved itself a lot of pain, misery and money if it had paid attention to the Notice to Proceed when that document arrived. It did not and therefore failed to point out that the owner had listed the wrong date for contract completion: The July 1, 2005, goal and not the September 23, 2005 deadline. SHC was not paying attention, either, when it signed two modifications which calculated extensions based on a July 1, 2005, completion date. It only woke up to the problem when the corps started threatening to withhold liquidated damages based on the July date as modified.
SHC barely dodged liquidated damages after seven years of protracted, expensive litigation. Through it all, SHC was at risk that, by accepting the NTP and the two misdated modifications, it would be held to have agreed to change the contract and accept an earlier completion date. All of this could have been avoided if the company had appointed a single employee responsible for reviewing incoming documents against the contract and raising discrepancies early. [Case taken from Appeal of Strand Hunt Construction Inc., ASBCA No. 55905 (April 11, 2013).]
Inadequate Management of Deadlines and Obligations
Absent disciplined internal review and control procedures, contract scheduling, reporting and documentation obligations may be forgotten. The result: The company may lack the very documentation it needs to pursue claimed time extensions, change orders or to defend against liquidated damages claims, often with dire consequences.
Another ASBCA case provides a good example. In 2012, Hedgecock Electric Inc. found itself seeking compensation for a 77-day delay in its contract to construct and repair airfield taxiways and edge lights. Hedgecock encountered hazardous materials which required a revised digging permit and additional HAZMAT training, and the military took over the airfield in order to load ammunition. The project was completed 77 days after the date of project completion, and Hedgecock applied for compensation for those extra 77 days of work. However, the Board only granted Hedgecock payment for 16 days. [Case taken from appeal of Hedgecock Electric Inc., ASBCA No. 56307.]
Why did the board refuse to pay Hedgecock for the remaining 61 days? Hedgecock did not keep updated project schedules, as required by the contract. Without updated project schedules, the board had to look at daily reports to get an accurate assessment as to what was going on at the construction site. Those daily reports were enough to show that the government caused a 16-day delay. However, that information was not detailed enough to prove that the government also caused the delays over the remaining 61 days. Hedgecock did not receive compensation for 61 days of work.
Looking at this another way, how much would it have cost Hedgecock to have an employee in place (or a subcontractor) to update the project schedules? It can be argued that the decision not to do so, and effectively to put the contract requirements in the draw, cost 61 days of delay damages, and possibly other delays that went unnoticed, as well as the cost of litigating to recover those damages.
What We Have Here Is a Failure to Communicate (in Writing)
Among the worst possible consequences of lax contract administration is that contractual rights may be waived by failing to provide adequate notice. Notice provisions are liberally sprinkled throughout most construction contracts. Our (again unscientific poll) suggests 99 out of 100 “changes” clauses will require some sort of timely notice to the customer. The notice is meant to alert the customer that its instructions constitute a compensable change that will increase cost of completion and give everyone a chance to take the most economical approach. If notice is not timely, the clause warns, recovery of cost overruns will be waived.
More often than not, such clauses will not be strictly construed. When these clauses are litigated, the critical inquiry, generally, is not whether the contractor complied with the letter of the contract, but whether the contractor’s failure to communicate prejudiced the customer’s ability to manage the project. Courts often hold that actual notice to the customer is sufficient, even if the notice did not comply with the particulars of the changes clause (e.g. the notice is late, or is verbal as opposed to written, or the customer knew anyway). In one recent Court of Federal Claims’ decision, however, this very issue appears to be trending back toward holding contractor’s feet to the fire in favor of protecting the customer.
K-Con Building Systems Inc. v. United States, 114 Fed.Cl. 595 (2014) was a dispute between a builder and the Coast Guard arising out of a Coast Guard contract with the builder to design and build a structure. The builder was chronically late in providing design drawings for the structure. When the builder did provide drawings, the Coast Guard requested changes. While these changes were, on their face, outside the scope of the builder’s proposal, the builder responded positively to the changes (probably to appease an anxious customer on a behind-schedule project) and incorporated the changes in future designs. While these were no doubt changes, the builder did not, at the time, provide written notice to the Coast Guard that it considered the changes out of scope. Only after disputes later arose, including assessment of liquidated damages, did the builder advise the Coast Guard that the changes would require an additive change order.
In evaluating this case, the court relied heavily on the builder’s lack of evidence that it had notified the Coast Guard of a compensable change. The court rejected the builder’s argument that notice would have been futile (since the Coast Guard would have insisted on the changes regardless) and looked to the language contract to deny builder’s claim for compensation for the changed work.
The K-Con decision shows that although courts will liberally construe a changes clause in favor of contractors, failure to clearly communicate with customers about changes to the work can still put your bottom line at serious risk. With that in mind, how much will it cost to assign someone within the organization to (a) identify notice requirements in new contracts, (b) modify the company’s internal protocols to make it easy for responsible field personnel to note possible changes and for responsible administrative personnel to submit and track notices and (c) actually check to make sure that field and administrative personnel are complying with the requirements?
Carol L. O’Riordan, Esquire, and Anthony J. Marchese, Esquire, work with O’Riordan Bethel Law Firm LLP.