September 20, 2005

Overview

Many different circumstances can delay or disrupt a construction project, placing intolerable risk and expense on the contractor. Factors such as adverse weather, differing site conditions, strikes, regulatory issues, and material cost escalation, to name a few, can have a major impact on the progress of the construction project and the contractor’s bottom line. However, a contractor that keeps detailed records and promptly responds to owner inquiries concerning these problems will be better prepared to successfully resolve the matter without a costly dispute than a contractor, which keeps few records and does not bother to explain the problem to the owner.

One example of a regulatory issue that can impact the progress of a federal construction project is the government withholding of progress payments due to an alleged violation of the federal Davis-Bacon Act (“DBA”), 40 U.S.C. § 3141, et seq., and its “related Acts.” The DBA requires that each federal contract over $2,000 for the construction, alteration, or repair of public buildings or public works contain a clause setting forth the minimum wages to be paid to various classes of laborers and mechanics employed under the contract. Under the provisions of the Act, contractors or their subcontractors are to pay workers no less than the so-called locally prevailing wages and fringe benefits. In addition to the DBA, Congress has added prevailing wage provisions to approximately 60 statutes which assist construction projects through grants, loans, loan guarantees, and insurance. These “related Acts” involve construction in such areas as transportation, housing, air and water pollution reduction, and health. Under the DBA and its related Acts, the government may withhold amounts from progress payments due to a contractor to remedy alleged violations.

Risks of Poor Documentation

The recent decision of the United States Court of Appeals for the Federal Circuit (“Federal Circuit”) in Copeland v. Veneman, 350 F.3d 1230 (Fed. Cir. 2003) (“Copeland”) highlights the fact that the practices of thorough record keeping and prompt response to owner inquires are just as applicable to cases involving government withholding of payment for alleged violations of the DBA as they are to cases involving changes, differing site conditions, delays, and disruption. In Copeland, a contractor who failed to keep adequate records and promptly respond to government inquiries concerning the government’s withholding of progress payments due to alleged DBA violations was not excused from a termination for default, even though it was later shown that the government’s withholding was erroneous and likely caused the default.

The relevant facts of Copeland were as follows. The contractor was awarded a construction contract by the National Forest Service to construct and reconstruct hiking trails. The contract amount was $112,900. The contractor was to be paid a series of progress payments. During performance of the contract, various employees of the contractor complained of DBA wage violations. In response, the contractor provided the contracting officer with incomplete documentation that did not fully address the employees’ complaints. In part, the contractor erroneously asserted that the DBA was not applicable to it as it was not an “union” contractor.

Based upon the employees’ allegations and the incomplete documentation provided by the contractor, the contracting officer decided to withhold a substantial amount of the contractor’s progress payment and referred the matter to the Department of Labor (“DOL”) to investigate a potential DBA violation. Subsequently, the DOL requested that the contracting officer withhold a total of $37,905 pending a final resolution. Although this request was made in July 1992 the DOL took no further actions on the alleged violation for over two years. In the interim, the contracting officer withheld additional amounts to bring the total amount up to $37,905.

Effect on Performance of Work

During the months following the progress payment withholdings, Forest Service inspectors found that the contractor’s progress on the contract was gradually becoming more delayed and it eventually terminated the contract for default in September of 1992. Contractor appealed this default termination to the Department of Agriculture board of contract appeals (“Board”) arguing that its delay was excusable because it resulted from the Forest Service’s erroneous DBA withholding.

Although the contractor’s appeal was timely, the Board dismissed the appeal pending resolution of the alleged DBA violations before the DOL. In 1999, approximately 6 years after the initial dismissal of the appeal of the default by the Board, a DOL administrative law judge found that only $3,951 should have been withheld due to DBA violations. Subsequent to this determination, the contractor reinstated its appeal at the Board. After a hearing in 2000, the Board held that the contractor had not demonstrated that the Contracting Officer “inappropriately withheld monies” in 1992. A dissenting board judge urged that the Board reverse the default as the 1999 DOL determination showed that the withholding was “grossly excessive”. The contractor appealed this adverse decision to the Federal Circuit. In its review, the Federal Circuit focused on whether the amount withheld was based on the Contracting Officer’s “reasonable judgment” that the withheld amounts were needed to protect the employees’ interests.

The Federal Circuit acknowledged that there was a serious question as to the propriety of the withholding given the difference in the amount ($3,951) actually verified by the DOL in 1999 as compared to the $37,905 withheld by the contracting officer in 1992. However, despite the vast difference between the actual violation and the withheld amount, the court found that the burden was on the contractor to show that the amount withheld by the government was unreasonable. The court held that to carry this burden, the contractor would have to show that the contracting officer acted unreasonably based on the information she had at the time of the withholding (1992).

After reviewing the facts of the case, the court held that the contractor did not meet this burden of showing that the contracting officer acted unreasonably. The court reached this conclusion because it found that the contractor had ample opportunity to provide data to the contracting officer to demonstrate that the claims were not true or to establish that the figure owed was a lesser amount, but the responses provided by the contractor were not adequate and provided only the “sketchiest” of data. This was highlighted by the fact that the contractor could not verify that it had actually made the contested payments when the Forest Service asked it to do so.

Thus, the court found that the Forest Service’s withholding could not be deemed excessive or unreasonable at the time it was made in light of the sparse documentation provided to it at the time by the contractor. Absent any meaningful submission by the contractor, the contracting officer could rely upon the DOL’s preliminary determination.

Conclusion

It is clear from the facts of Copeland, that the amount withheld from the contractor’s progress payments by the contracting officer was far too high in light of the size of the project and the actual DBA violations shown. It is also likely that this high withholding finally impacted the contractor to an extent that caused it to delay the project and eventually led to its termination for default. However, by failing to keep detailed records and promptly respond to the government’s inquiries, the contractor lost its ability to later challenge the government’s decision. In sum, detailed record keeping and a policy of fully and promptly responding to the inquiries of the owner or contracting officer concerning the potential problems, has been proven effective in other contexts, would likely have made the difference for the contractor in this situation involving the government’s DBA withholding.