Has the Government “Waived” Goodbye to Strict Compliance with Your Contract Specifications?

by Cohen Seglias Pallas Greenhall & Furman PC
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Good news for federal construction contractors: a recent Armed Services Board of Contract Appeals (Board) decision confirmed that waiver defenses can defeat government demands for strict compliance with contract requirements. On December 19, 2017, the Board found in Appeal of American West Construction, LLC that the United States Army Corps of Engineers (Corps) had effectively waived the right to enforce a construction contract specification. This meant that the government could not recover from the contractor the difference in the price it paid for the original specification and the lower amount spent by the contractor to perform the deviation. In a world where the government often has the right to strictly enforce contract requirements and hold contractors financially responsible for any deviation, this decision is a big win for construction contractors. 

The solicitation at issue in Appeal of American West Construction sought proposals for the construction of bridges over certain irrigation canals in El Paso County, Texas for the Corps. The solicitation specified that the contractor should build temporary bridges to access the construction site and then remove those temporary bridges after the permanent bridges were finished. One offeror, American West Construction, LLC (American West), believed it would be less expensive, faster, and safer to access the site via a levee, rather than building temporary bridges. However, to use the levee, American West had to apply for an easement from a local water district and obtain the necessary permits. Those items were not finalized in time for the levee plan to be incorporated into American West’s response to the solicitation. Accordingly, American West’s proposal and price included the construction of the originally-contemplated temporary bridges, rather than the use of the levee. American West ultimately received a contract award and was directed to proceed with the work outlined in its proposal, including construction of the temporary bridges. 

However, after receiving the contract award, American West obtained the permits necessary to access the levee. It scrapped the construction plan laid out in its proposal and proceeded to access the construction site through the levee without building the contractually-mandated temporary bridges. American West liked this substantially cheaper plan — what contractor doesn’t like an increased profit margin? The Corps, however, disagreed. Because it had never approved this deviation from the contractual specifications, the Corps asserted a claim against American West for the difference in cost between the construction of temporary bridges, and the use of the levee — a difference of approximately $40,000. 

At first glance, it might appear that the government had a fail-proof argument. As any experienced federal contractor will tell you, the government may require strict compliance with terms of a contract, even if other methods of performance are more efficient. Moreover, if a contractor does not fulfill its contractual requirements, the government is entitled to adjust the contract price downwards and, further, may withhold payments to the contractor to set off the price difference of the alternate work. But — as American West made clear — sometimes, the government’s conduct during contract performance may amount to a “waiver,” which releases the contractor from strictly complying with its contractual requirements, even absent explicit approval from the government. American West also made it clear that the government may be prohibited from seeking compensation for the difference in price from a contractor. 

So how do you, as a contractor, know when strict compliance is required and when the government’s conduct has amounted to a waiver? The answer depends on the specific facts of each case, but there are a few key points to keep in mind. Generally speaking, when: (1) the government is aware of the contractor’s deviation, but (2) fails to demand strict compliance for (3) an extended period of time, such that (4) the contractor reasonably believes compliance is not required, the government has likely waived its right to demand strict compliance later. 

For example, in the American West case, the government was made aware through a submittal that American West planned to access the site via the levee rather than using temporary bridges. Although the Corps never explicitly approved the plan to use the levee, it also never explicitly rejected it. For four months, the Corps regularly had personnel onsite observing the use of the levee, noted in several construction meeting minutes that American West obtained the necessary permits to use the levee, and approved and made progress payments, all without raising any objection to the levee. The Board reasoned that this conduct led American West to reasonably believe that the Corps no longer required the temporary bridges to be built. Accordingly, when the Corps later sought reimbursement for the difference in price, it was too late. The Board held that the Corps’ conduct had already waived strict compliance. The agency, therefore, had no right to pursue recovery from American West, even though American West had admittedly deviated from the contract specifications. This meant that American West did not have to pay the Corps the $40,000 it saved by using the levees. 

So what does this mean for you?
Federal contractors should be aware that, while deviation from contract specifications is never ideal, you are not necessarily without defenses if deviation has already occurred. If the government has implicitly accepted your work, observed but failed to object to your work, or engaged in any other conduct that has led you to reasonably believe that it has waived the contractual requirements from which you deviated, you may be able to defeat a claim against you. That said, while this is certainly a helpful decision for contractors, it is important to remember that the availability of a successful waiver argument depends on the specific circumstances of your case. It is still best practice to ensure the government provides explicit approval for deviations to contract specifications. If you are a contractor facing government claims for reimbursement for your deviation from contract requirements, be sure to contact a legal professional to determine whether a waiver defense applies to your situation.

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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