Contracting In The Fog Of War: Recovering Costs Caused By An Epidemic

Morrison & Foerster LLP - Government Contracts Insights

[co-author: Victoria Dalcourt Angle]

Like the rest of the nation, and indeed the whole world, contractors today are fighting a war against an invisible enemy. As we observed in a previous post, responding to COVID-19 raises wartime contracting issues on the home front and abroad. In “Contracting in the Fog of War,” we reported on IAP Worldwide Servs., Inc., ASBCA Nos. 59397 et al., 17-1 BCA ¶ 36763 (May 17, 2017), in which the Armed Services Board of Contract Appeals (ASBCA) agreed with a contractor’s claim that the government had constructively accelerated performance in the face of excusable delays due to Pakistan’s closure of its borders to military shipments into Afghanistan. The ASBCA concluded there that the contractor was “entitled to an equitable adjustment reimbursing it for expenses actually and reasonably incurred in complying with the acceleration orders.” 17-1 BCA ¶ 36763. In this post, however, we discuss the Civilian Board of Contract Appeals’ (CBCA) recent decision that a contractor’s additional costs incurred due to the Ebola outbreak did not entitle the contractor to an equitable adjustment. The case could have important implications for COVID-related claims, and may offer an important lesson for contractors.

In Pernix Serka Joint Venture v. Department of State, CBCA No. 5683 (April 22, 2020), Pernix Serka Joint Venture (PSJV) was performing a firm, fixed-price contract for the Department of State (DOS) when the Ebola virus hit. The contract required PSJV to construct a rainwater capture and storage system in Freetown, Sierra Leone. The contract included an excusable delays clause providing that PSJV would be allowed time, but not additional costs, for excusable delays. Examples of excusable delays included acts of God, epidemics, and quarantine restrictions. PSJV received a notice to proceed from DOS on December 17, 2013, and began contract performance. By July 2014, the Ebola outbreak had spread to Sierra Leone.

PSJV sought guidance from the DOS contracting officer (CO) as to how to respond to the outbreak. The CO, however, did not provide any guidance. Instead, the Agency stated that PSJV would need to make its own decisions about whether PSJV should evacuate the jobsite to protect the health and safety of its personnel. On August 8, 2014, the World Health Organization (WHO) declared the outbreak an “international public health emergency.” That same day, PSJV decided to shut down the project and evacuate its personnel.

PSJV notified DOS of its decision to temporarily shut down the project. In response, DOS stated: “Since you are taking this action unilaterally based on circumstances beyond the control of either contracting party, we perceive no basis upon which you could properly claim an equitable adjustment from the Government with respect to additional costs you may incur in connection with your decision to curtail work on this project.”

In March 2015, PSJV returned to the project site with additional medical facilities and services to protect its employees. PSJV then submitted two requests for equitable adjustment (REAs) to the CO for the cost impacts associated with the Ebola outbreak. The CO denied the first REA, stating, “there is no contractual basis for an adjustment to the contract price.” The CO did not take action on the second REA.

In January 2017, PSJV submitted a certified claim for $1,255,759.88. The claim sought “(1) $608,891 in additional life safety and health costs incurred due to differing site conditions, disruption of work and the need to maintain a safe work site for the Pernix Serka Joint Ventures work and Government personnel, and (2) $646,868.88 in additional costs incurred resulting from that disruption of work, and the need to demobilize and remobilize at the work site.” PSJV offered several theories for why these unforeseen costs should fall on the Government, including a cardinal change theory, a constructive change theory, and a constructive suspension of work theory. PSJV did not assert a constructive acceleration claim. The DOS moved for summary judgment, arguing that PSJV bore the risk of any unexpected costs not attributable to the Government under its firm, fixed-price contract, and the CBCA agreed.

First, the Board stated, “PSJV’s firm, fixed-price contract obligated PSJV to perform and receive only the fixed price.” The contract explicitly stated that acts of God, epidemics, and quarantine restrictions would entitle PSJV to additional time, but not additional costs. Therefore, PSJV cannot shift the risk of additional performance costs to the Government. Furthermore, the contract did not “require the Government to provide PSJV with direction on how to respond to the Ebola outbreak.” The Agency left it up to PSJV to decide whether to evacuate the worksite, and under the firm, fixed-price contract, PSJV bore the risk of any additional costs.

Second, the Board addressed PSJV’s theory that it “was forced to perform in cardinal change conditions.” A “cardinal change” is “a breach that occurs if the Government effects a change in the contractor’s work ‘so drastic that it effectively requires the contractor to perform duties materially different from’ those found in the original contract.” PSJV asserted a cardinal change occurred when the Bureau of Overseas Building Operations (OBO), a branch within DOS, expected PSJV to work in Ebola crisis conditions without any guidance or direction from OBO, or a suspension of work. PSJV further alleged that a cardinal change occurred when OBO pressured PSJV to return to the project site, which required PSJV to add safety measures that were not in its approved work plan. The Board found this argument unavailing because, “[d]espite the difficulties encountered during the Ebola outbreak, the Government never changed the description of work it expected from the contractor.” DOS informed PSJV that it would not order PSJV to evacuate the site and that PSJV would need to make its own decision as to whether it needed to demobilize from the site or take other steps to protect its personnel. Furthermore, the implementation of additional safety measures after remobilization did not alter the contract. PSJV remained obligated to perform at the contract price.

Third, the Board addressed PSJV’s constructive change theory that it “was constructively ordered to provide medical and life safety measures outside the scope of the contract.” A constructive change occurs when a contractor performs work beyond the contract requirements without a formal change order. To recover on a constructive change claim, a contractor must show that (1) it performed work beyond the contract requirements and (2) the Government directed the contractor to perform the additional work without following the procedures in the Changes clause. PSJV argued that both the demobilization and remobilization of its personnel and the additional safety measures put in place due to the Ebola epidemic should be considered constructive changes. PSJV’s arguments failed, however, because the Government did not order it to take any action in response to the Ebola epidemic.

Finally, the Board briefly addressed PSJV’s constructive suspension of work claim. In its opposition brief, PSJV argued that the outbreak resulted in a constructive suspension of work. However, the Board found this claim untimely because it did not arise from the same set of operative facts as the theories raised in PSJV’s certified claim. For these reasons, the Board denied the appeal.

Key Takeaways and Missed Opportunities

In this case, the Agency put the contractor in a difficult position by not providing it any guidance or direction on how to respond to the outbreak. The Agency did not tell the contractor to do anything, so the contractor had no constructive change claim.

The Board might have reached a different conclusion had the company been in a position to pursue a constructive acceleration claim. A constructive acceleration claim requires: (1) a delay which entitles the contractor to additional time for performance (such as an excusable delay), (2) contractor notice to the government of such delay and a request for an extension of time, (3) an action or statement by the government that can be construed as an acceleration order, and (4) reasonable efforts by the contractor to accelerate work, resulting in additional costs.

In the IAP case, the agency’s failure to promptly grant an extension request (which the contractor was entitled to receive due to excusable delay) constituted constructive acceleration. While there is no guarantee it would have succeeded, PSJV might have been able to pursue a constructive acceleration with the proper groundwork, which would likely have involved the contractor (a) advising DOS that the schedule impact caused by the outbreak was unknown, (b) expressly asking DOS to agree to an excusable delay for the length of the epidemic and until the CO was able to establish a new, reasonable schedule, and then (c) refusing to restart operations until the epidemic was over unless the Agency ordered a restart. Instead, the contractor played into the Agency’s hands by making the unilateral decision to cease work and then to restart operations with added safety measures.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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