Recovering Construction Costs for A Virus Outbreak—Shifting the Risk for Unforeseen Epidemic Costs Was Not Allowed

Snell & Wilmer

Snell & WilmerNow that COVID-19 impacts and costs are a fact of life, what can we expect in the way of decisions regarding compensation for costs incurred by contractors?

If the case of Pernix Serka Joint Venture v. Department of State, CBCA 5683; 2020 WL 1970843 (April 2020) is any indicator in a federal government contract, costs incurred out of concern for worker safety and impacts arising during a virus outbreak (Ebola) were not compensable as either force majeure, cardinal change or a constructive change. The Pernix case arose from a fixed price contract for a rainwater capture and storage system in Freetown, Sierra Leone, Africa with the United States Government ("Government"). The government contractor, Pernix Serka JV, became concerned for worker safety during an Ebola outbreak and when the World Health Organization declared an international health emergency it shut down the project and demobilized. When the project resumed, the contractor put in place additional health and safety measures for its workforce and sought to recover the additional costs from the Government for the health and safety measures and additional time and costs due to the impacts incurred. The contractor pursued its claims in the form of a Request for Equitable Adjustment ("REA") under the contract terms using for support "Excusable Delays", Cardinal Change and constructive change theories.

The contracting officer did not shut the project down. The contracting officer noted that the contractor unilaterally shut down the project based on circumstances beyond the control of either party and determined there was no basis upon which the contractor could properly claim an equitable adjustment from the Government with respect to the additional costs claimed. The Government did acknowledge that the contractor may be entitled to a non-compensable time extension under Excusable Delay provisions of the contract. The contract included a clause entitled "Excusable Delays", which stated:

F.8.1 The contractor will be allowed time, not money, for excusable delays as defined in FAR 52.249-10, Default… Examples of such cases include (1) acts of God or of the public enemy; … (7) epidemics; (8) quarantine restrictions; …

F8.2 In each instance, the failure to perform must be beyond the contract and without the fault or negligence of the Contractor, and the failure to perform furthermore (1) must be one that the Contractor could not have reasonably anticipated and taken adequate measures to protect against, (2) cannot be overcome by reasonable efforts to reschedule the work, and (3) directly and materially affects the date of final completion of the project.

The contractor submitted REAs for cost impacts associated with additional life safety and health provisions and another for time and cost impacts associated with additional work and effort undertaken from the Ebola virus breakout. The REAs were denied by the contracting officer. The Government was granted summary judgment in its favor on the contractor's claim. The contractor appealed to the CBCA and it denied the contractor's appeal.

On appeal, the Board noted that a firm, fixed price contract places the risk on the contractor. The Board stated that "a contractor with a fixed price contract assumes the risk of unexpected costs not attributable to the Government." Absent a special adjustment clause, a contractor with a fixed price contract assumes the risk of increased cost not attributable to the Government. The Board noted that the contract, in clause F8.1 and the referenced clause FAR 52.249-10, explicitly addressed how acts of God, epidemics and quarantine restrictions are to be treated. A contractor is entitled to additional time but not additional cost. The Board noted that the contractor did not identify any clause in the contract that served to shift the risk to the Government for any costs incurred due to an unforeseen epidemic. It further noted the contract did not require the Government to provide the contractor with direction on how to proceed during the Ebola outbreak. Thus, under a firm, fixed price contract, the Board determined the contractor must bear the additional cost of contract performance, even if the contractor did not contemplate those measures at the time it submitted its proposal or at contract award.

The Board also rejected other legal theories that the contractor pursued that the contractor argued shifted the risk of increased costs of performance from the contractor to the Government. The contractor claimed that it was forced to perform in cardinal change conditions or was constructively ordered to provide medical and life safety measures outside the scope of the contract or incur costs due to the breach of the Government's implied duty to cooperate. Each theory was rejected as a basis for entitling the contractor to relief.

In rejecting the cardinal change theory, the Board noted a cardinal change arises from a unilateral modification that then results in a large increase in the contract burden. A cardinal change is a breach of contract that occurs if the Government affects 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. In deciding whether a single change or a series of changes is a cardinal change to the contract, the Board noted you look to the work done in compliance with the change and ascertain whether it was essentially the same work as the parties bargained for when the contract was awarded. A contractor has no right to complain if the project it ultimately constructed was essentially the same as the one it contracted to construct. Here, the work required of the contractor was detailed in the contract. The Board held the addition of life safety measures after demobilization did not alter the nature of the thing that contractor had contracted for; the contractor remained obligated to perform at the fixed price.

The Board also rejected the contractor's "constructive change" argument. The Board noted a constructive change occurs where a contractor performs work beyond the contract requirements without a formal order, either by an informal order or due to the fault of the Government. To recover on a constructive change claim, the contractor must show that (1) it performed work beyond the contract requirements and (2) the Government ordered-expressly or implicitly-the contractor to perform the additional work. The Board noted that a contractor cannot invoke a claim for constructive change against the Government unless the Government affects an alteration in the work to be performed. The contractor here failed to prove that the Government ordered it to take an action in response to the Ebola outbreak or that the Government's inaction rose to the level of a constructive change. The Board stated: "Simply put, [the contractor] fails to demonstrate a constructive change because no change to the contract occurred." The contractor remained obligated to perform throughout the performance period, and the Excusable Delay clause provided for additional time, but not additional money.

The upshot here is to carefully read your contract to determine if, in the case of force majeure due to epidemic, quarantine or acts of God, it limits you to nonmonetary compensation, such as non-compensable delay or extension of time. No doubt owners with analogous language in their contracts may take a similar approach as the Government did here in denying monetary compensation. Furthermore, this decision casts doubt regarding whether risk can be shifted to the owner in a fixed price contract under theories of cardinal change or constructive change.

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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