November 13, 2009

Overview

Changes to construction projects are relatively common especially on public projects. Revised requirements and the availability of additional funds often prompt owners to modify a project while it is being constructed. Depending upon the scope, number, and timing of the modifications, the overall impact on a project can vary substantially. A single change, even a relatively significant one, may be evaluated, priced, and implemented without a major disruption to the overall project. In contrast, scores of changes can be very disruptive to the scheduling and the effective management of the work.  While each proposed modification is typically priced on an individual basis, a contractor must attempt to anticipate whether that change will be a relatively isolated event on the project or one of scores or more changes to the project.

In negotiating the price for each modification, any owner naturally seeks closure on the cost. That cost often includes the estimated direct cost (labor, materials, and equipment) for the revised work and for the added time necessary to perform that work. Typically, that pricing is premised upon certain anticipated conditions of performance, which can change dramatically, especially if the project is later subjected to more and more changes and modifications. This uncertainty can present a substantial risk for a contractor.

In that context, owners seek to obtain closure by having the contractor execute a release whenever there is an agreement on the price for a contract modification. For example, on federal government contracts, Section 43.204© of the Federal Acquisition Regulation instructs contracting officers that they should seek to obtain a release whenever there is agreement on the price for a modification. When presented with a request to execute a release, a contractor needs to carefully consider the wording of the release, and seek to anticipate the consequences of providing it. As illustrated by the 2009 decision by the United States Court of Appeals for the Federal Circuit in Bell BCI Co. v. United States, 570 F.3d 1337 (Fed. Cir. 2009) a change order release can have significant adverse consequences for a contractor.

Bell’s Contract
The Bell decision arose in the context of a contract to construct a new five-story laboratory building for the National Institutes of Health (NIH). With a contract award date of March 26, 1998, the original project had a completion date of June 29, 2000. Approximately 8 months into the 29-month schedule, the project was on schedule. At that time, NIH discovered it had a budget surplus and decided to add another floor (a “new” fourth floor) to the building.  Subsequently, the parties entered into a modification (Modification 93) on October 2, 2000 to compensate the contractor for the new floor and to provide a revised completion date. Modification 93 (Mod 93) contained two paragraphs (paragraphs 4 and 8) that ultimately controlled the decision at the Federal Circuit. Paragraph 4 read that Mod 93 would:

[I]ncrease the contract amount by $2,296,963 . . . as full and equitable adjustment for the remaining direct and indirect costs of the Floor 4 fit-out . . . and full and equitable adjustment for all delays resulting from any and all Government changes transmitted to the contractor on or before August 31, 2000.

Paragraph 8 of that modification contained a release and read:

The modification agreed to herein is a fair and equitable adjustment for the Contractor’s direct and indirect costs. This modification provides full compensation for the changed work, including contract cost and contract time. The Contactor hereby releases the Government from any and all further liability under this contract for further equitable adjustment attributable to the modification.  (Emphasis added)

Within one week of the execution of Mod 93 representatives of the contractor and NIH’s construction manager jointly advised NIH in writing that NIH should refrain from making additional modifications to the project if the work was to meet the revised completion schedule.  NIH did not heed that advice. Rather, it issued an additional 279 Extra Work Orders.

Of the 279 Extra Work Orders, 216 were incorporated into 113 contract modifications. NIH refused to pay for the other 58 Extra Work Orders, although Bell performed the work.

About 47 of the 113 further modifications contained the release language found in paragraph 8 of Mod 93. After realizing that the government was not controlling the number of changes to the project, Bell expressly reserved its rights under the balance of the modifications.

Bell’s Claim for Delay and Impact

Bell ultimately completed the work on February 8, 2002 and submitted a claim for an equitable adjustment. In a contracting officer’s final decision, NIH, in addition to refusing to pay for the 58 Extra Work Orders, sought to recover liquidated damages, the value of credits, and the estimated costs for correction of alleged major deficiencies.  Bell filed suit in the U.S. Court of Federal Claims (COFC).  Following the trial, the COFC awarded Bell $6,200,672 including $2,058,456 for labor inefficiency due to the cumulative impact of the changes and $1,602,053 for delay.

NIH appealed the adverse decision to the Federal Circuit.  While deferring to the COFC’s decisions on the methodology for computing the contractor’s damages, the Federal Circuit vacated the COFC’s judgment based on the appellate court’s reading of the “any and all liability” release language set forth in Mod 93 and in some 47 other modifications. In its interpretation of this release language, the Federal Circuit’s decision acknowledged that Mod 93 was executed in the context of a request that NIH limit further changes, and further recognized that paragraph 4 of Mod 93 stated the express purpose of the monetary compensation in that modification. However, neither of those circumstances operated to limit the scope of the “any and all liability” phrase in Modification 93. That release language applied to a claim for the cumulative impact of all of NIH’s EWOs and other directives issued to contractor.

According to the Federal Circuit, upon remand, the COFC could award inefficiency costs and delay costs for only those modifications, which did not contain the “any and all liability” release language. To the Federal Circuit that release language was unambiguous and it was not proper to interpret it in light of the circumstances surrounding the execution of Mod 93 or the specific compensation allowed in it. Even though Mod 93, as well as the other modifications containing that release language, do not appear to have expressly addressed cumulative impact, the “any and all liability” release language encompassed that type of claim and recovery. The practical effect of this ruling upon remand to the COFC could be substantial.

Points to Remember

Given that the Federal Circuit’s interpretation of the “any and all liability” release language is binding on the boards of contract appeals, as well as the COFC, there are several key points to remember.

• Contractors need to anticipate that this language will become the government’s standard release.
• Contractors need to consider as many of the potential future scenarios as possible when agreeing to this form of a release. Remember, Bell’s anticipation of minimal future changes after the execution of Mod 93 did not occur.
• The FAR provision (Section 43.204©) setting forth the release does not require the contractor to sign a release.  The suggested form release in the FAR can be modified.  Consider the consequences if Bell had expressly qualified the release in Mod 93 on the condition that only a limited number of future changes would be issued or expressly reserved its right for a cumulative impact claim while agreeing on the value (price) of the specific scope of work in Modification 93.
• In an era of past performance evaluations, contractors may be urged to execute releases to demonstrate a cooperative spirit with the agency. While adamantly refusing to sign any release and invoking the Disputes process may not be desirable, contractors need to consider tailoring or limiting the release to the anticipated conditions and to seek professional advice, as needed, if the government sets forth a “take it or leave it” position on the wording of the release.

Thomas J. Kelleher
(404) 582-8016
[email protected]
Member of the State Bars of Georgia and Virginia