Hasta La Vista, Baby! Contracting Officer Erroneously Terminates Contractor for Default - Construction and Procurement Law News, Q1 2021

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In a December 2020 opinion, the United States Civilian Board of Contract Appeals (the “Board”) reviewed and reversed a Federal Highway Administration (“FHWA”) Contracting Officer’s (“CO”) decision to terminate for default Eagle Peak Rock & Paving, Inc.’s thirty-six million dollar contract (the “Contract”) for work on a project in Yellowstone National Park (the “Project”). Its decision underscored the fact that government “Terminators” should think twice before terminating a contractor for default.

In May of 2016, FHWA awarded Eagle Peak the Contract for the Project. The Contract anticipated a three-year Project duration, and it was governed by both the Federal Acquisition Regulations and FHWA Special Contract Requirements. Pursuant to a provision in those documents, Eagle Peak had to submit an initial construction schedule within twenty days of receiving its notice to proceed. The construction schedule had to reflect completion of the work within the Contract time and include both a Critical Path Method schedule and a written narrative. Eagle Peak had to prosecute its work with sufficient diligence to complete the Contract within the Contract time.

Shortly after FHWA issued the NTP, Eagle Creek successively submitted three baseline schedules, each of which the CO rejected for, among other things, missing items of work and/or flawed logic. The CO stated in an October 3, 2016 cure letter that Eagle Peak was four months past the NTP date and still had not submitted an approved schedule. The CO gave Eagle Peak an ultimatum: provide an approvable schedule within ten days or face termination of the Contract for default.

Eagle Peak submitted revised baseline schedules on October 13, 2016, November 23, 2016, and January 23, 2017, respectively. Eagle Peak’s submissions were accompanied by narratives that described its plan for mobilizing additional crew members, overcoming delays, and sourcing materials. Eagle Peak assured the CO there was sufficient time to accommodate any changes to the schedule. The CO rejected the October 13, 2016 schedule due to missing items, flawed durations and production rates, and logic flaws. The CO never responded to the November 23, 2016 schedule submission. The CO also rejected Eagle Peak’s January 23, 2017 schedule over Eagle Peak’s objections that the CO’s demands exceeded Contract requirements and industry standards. Eagle Peak argued that the CO demanded flawless logic ties and did not account for additional resources described in Eagle Peak’s narratives. On January 25, 2017, Eagle Peak submitted its final “recovery schedule,” in an attempt to respond to the CO’s demands.

On February 1, 2017, the CO rejected the recovery schedule and default terminated Eagle Peak’s right to proceed , based on its failure to prosecute its work with the diligence required to ensure completion within the Contract time. The termination letter stated that Eagle Peak had only completed 10% of its work on the Project despite 30% of the Contract time having passed. Eagle Peak appealed the termination for default to the Board.

The Board began its review of the CO’s decision to terminate for default by noting that such a measure “is a drastic sanction which should be imposed . . . only for good cause grounds and on solid evidence.” Terminations for default usually occur when it is reasonable for a CO to determine there is “no reasonable likelihood” of timely completion by the contractor. In looking at the reasonableness of a CO’s decision, the Board considers factors like the urgency of the need for the services described in the contract and the time it would take for another contractor to complete the scope.

In this case, with nearly two years still remaining on the Project duration, the CO failed to consider the time Eagle Peak had remaining to complete the work and its repeated assurances of additional resources. Per the Contract, the narratives were just as much a part of the schedule submissions as the CPM schedule itself, and the CO had not carefully examined the narratives. Further, the CO’s estimate of Eagle Peak’s percentage complete overlooked Eagle Peak’s mobilization efforts. Expert testimony revealed that at least two of Eagle Peak’s schedules met Contract requirements, and the outstanding value of the missing activities on the rejected schedules was minimal in comparison to the total Contract value.

Most importantly, the Board noted that the actual “intent and value” of a CPM schedule is to provide an efficient way of organizing and scheduling a complex project. Inevitably, changes will happen so a contractor’s initial network analysis “is not cast in bronze.” While a contractor may be in technical default based on minor errors in its schedule, this is not determinative of grounds for termination for default. The government must be fair and reasonable in exercising its discretion. The Board determined that the CO’s decision here was arbitrary and capricious and should be converted to a termination for convenience. The Board’s decision allowed Eagle Peak to pursue damages against FHWA.

This case serves as a reminder that government contractors can challenge a CO’s decisions related to schedule submissions that are largely in compliance with the FAR, applicable regulations, and industry standard. Minor errors in logic ties or missing items in a schedule are not necessarily fatal flaws. Schedule narratives can provide the essential information to move a schedule toward approval. Equally important, note that Eagle Peak was timely in its repeated efforts to address the government’s concerns. From the owner side, the owner’s project leadershould think twice before saying “Hasta La Vista!” to a contractor for default.

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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