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To supplement the famous words of Benjamin Franklin, “[I]n this world nothing can be said to certain except death and taxes” — and construction delays. (See Benjamin Franklin, Letter to Jean-Baptiste Le Roy, 1789.) While construction delays may not have been an issue as far back as 1789, they are certainly a frequent occurrence today.
As a result, contractors must understand the contractual effects of delays caused by external issues (such as adverse weather, labor strikes or pandemics) or caused by the owner or its representatives. Some of these delays are compensable, meaning the owner, or a third party, will compensate the performing party for delays to the project.
Other delays are merely excusable, meaning that the performing party will only receive extra time to perform. An owner will neither penalize nor compensate the delayed party for an excusable delay absent an express contractual provision to the contrary.
In light of the COVID-19 pandemic, it is critical for contractors to understand the distinction between compensable and excusable delays. When governors across the country suspended nonessential construction by issuing executive orders, such stoppages triggered the standard, but often forgotten force majeure clause in contracts. See, e.g., N.J. Exec. Order No. 122 (April 8, 2020).
The typical force majeure clause addresses delays due to unforeseeable events (such as pandemics). However, unless a contract specifically provides for compensation for unforeseeable delays (i.e., compensable delays), the performing party contractually will be restricted to additional time without the benefit of additional money (i.e., excusable delays).
Despite contractual limitations, contractors may turn to common law theories to seek additional compensation for delays. One such theory is constructive change, a theory which is predominantly invoked in connection with government contracts. Constructive change occurs when “a contractor performs work beyond the contract requirements without a formal order, either by an informal order or due to the fault of the” contracting party. Int’l Data Prods. Corp. v. United States, 492 F.3d 1317, 1325 (Fed. Cir. 2007).
In adjudicating a claim for constructive change, a tribunal will analyze the contractual language to determine each party’s obligations and to see if the owner ordered more than the contract required. See Kiewit Infrastructure West Co. v. United States, 972 F.3d 1322, 1330 (Fed. Cir. 2020). Logically, pandemics will rarely give rise to constructive changes since they (a) never arise due to the fault of the owner; and (b) they seldom mean that the owner requires additional work.
A second theory to consider is that of “cardinal change,” another staple in the arsenal of government contract defenses. “Under established case law, a cardinal change is a breach. It occurs when the government effects an alteration in the work so drastic that it effectively requires the contractor to perform duties materially different from those originally bargained for.” Allied Materials & Equip. Co. v. United States, 569 F.2d 562, 563-64 (Ct. Cl. 1978).
Like constructive change, cardinal change requires an action on the part of the owner. Thus, pandemics are not going to result in a cardinal change in the contractor’s scope.
In the recent case of Pernix Serka Joint Venture v. Dep’t of State, CBCA 5683, 20-1 BCA ¶ 37,589, the Civilian Board of Contract Appeals (CBCA) addressed the doctrines of constructive change and cardinal change in the context of a pandemic — the Ebola crisis of 2013.
Pernix involved a dispute between the federal government and a contractor. Specifically, the U.S. Department of State (“DOS”) contracted with Pernix Serka Joint Venture to construct a rainwater and capture system in Freetown, Sierra Leone. Unfortunately, Pernix’s work coincided with the Ebola outbreak in 2013, forcing Pernix to withdraw temporarily from the project.
Notably, the government did not order Pernix to withdraw from the project. Fearing for the safety of its personnel, the contracting firm made the independent, reasonable and justifiable decision to shut down. Pernix eventually returned to Sierra Leone in 2015, but incurred a total of $1,255,759.88 in expenses because of the outbreak.
These costs were for additional life safety and health measures incurred due to differing site conditions, disruption of work and the need to maintain a safe work site for Pernix and government personnel — a variety of delay damages. Pernix also sought additional costs incurred resulting from that disruption of work, including demobilization and remobilization.
The government’s contracting officer denied Pernix’s request for an equitable adjustment to the contract price, finding that the delay from the Ebola virus was excusable, but not compensable.
Pernix proceeded to perfect its appeal of the contracting officer’s decision by filing a certified claim for $1,2755,759.88, followed by an appeal to the Civilian Board of Contract Appeals. The DOS moved for summary judgment, arguing that Pernix had a fixed-price contract and it assumed the risks of any unanticipated costs not caused by the government.
Pernix opposed the motion, noting that there were genuine issues of material fact regarding its claims for cardinal change, constructive change and breach of the implied covenant of good faith and fair dealing
Like most courts, the CBCA began its analysis by looking at the text of Pernix’s contract. The contract specified that the government allowed “time, not money” for certain delays, including pandemics. It reached this conclusion by noting that the Pernix contract references Federal Acquisition Regulation (FAR) 52.249-10 — the regulation dealing with default in fixed price contracts.
Specifically, this clause references an extension of time — not additional compensation — as the remedy for a contractor aggrieved by a delay caused by “(i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers.” 48 C.F.R. 52.249-10 (emphasis added).
This regulation is consistent with FAR 52.249-14(a), the force majeure provision that applies to government contracts:
“Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor. Default includes failure to make progress in the work so as to endanger performance.” 48 C.F.R. 52-249-14 (emphasis added).
Thus, the FAR, which are customarily part of government contracts, impose the risk of unforeseeable delays upon Pernix, the contractor, and not the government. Accordingly, the CBCA found Pernix’s attempt to “shift the risks clearly by the contract are unavailing.”
Contract terms that delineate when and which delays provide compensation or merely additional time reflect an assignment of risk. If the contractor gets extra time but not money, it bears the financial risks of unforeseen events which cause delay(s). If the government contractually provides the contractor with extra compensation for a delay that the contractor did not cause, then the government implicitly bears the risk of unexpected delays.
In the face of clear (and unfavorable) contractual language, Pernix drew upon common law theories to seek additional costs from the government. Pernix first cited to cardinal change, arguing that there was a drastic change in its contractual work that required it to perform additional duties for additional compensation.
The CBCA rejected this argument because Pernix improperly characterized the Ebola crisis as a contractual change rather than as an unforeseen condition. Even though the pandemic made work impractical, the government did not change or enlarge the contractual obligations of Pernix.
Second, Pernix argued that a constructive change occurred. Critically, however, the government did not force Pernix to leave Sierra Leone. Even though Pernix faced an impossible choice: stay and risk the health of its workers, or leave and face additional costs (making the project unprofitable), Pernix bore the risk of that impossible choice mandated by the plain language of the parties’ contract.
The CBCA ultimately granted the government’s motion for summary judgment and denied Pernix’s appeal.
The holding in Pernix is instructive in the age of COVID-19. A contractor must be very careful in responding to a pandemic. While the natural and reasonable inclination is to protect the contractor’s employees, the government is still going to look to the parties’ contract when it comes to the issues of additional time or additional compensation.
Unless the government suspends operations before the contractor does, a contractor will be limited to contractual remedies for unexpected delays. While this may not seem “fair” to the contractor, courts will be reluctant to shift the risk allocated by the parties’ contract provisions.
Indeed, courts typically will not change a contract to alter the bargain entered into by two sophisticated parties. A contractual provision — or regulatory provision such as 48 C.F.R. 52-249-14 — only excusing delays imposes the financial risks of such delays upon the contractor. Conversely, a contract provision granting compensation for unexpected delays imposes the risk on the owner.
Contractors must remember that with very limited exceptions, courts will strictly enforce the bargain made. Therefore, contractors must carefully consider the allocation of risk, as well as the attendant costs, for possible delays during the negotiation process (and before the contract documents are executed).