In the latest Weekly Wright Report:
- In Government Contracting, Not All Changes are Inevitable – read now
- Can a General Contractor Be Too Demanding? – read now
- Tips for Teaming Agreements – read now
In Government Contracting, Not All Changes are Inevitable
Federal government contracts permit the government to unilaterally modify the contract under the “changes” clause without seeking the consent of the contractor or its surety. This right is typically limited only by whether the contractor should have expected such a change and it falls within the general scope of the contract. In the event the government requires such a change, even if there is no agreement on price, the contractor must perform the work and its remedy is to then seek an equitable adjustment. What if the government goes too far and changes the contract in ways which the contractor should not have expected? Such changes are known as “cardinal changes” and create a situation where a contractor may be discharged if the change is so drastic that the contractor’s work is now materially different than what was bargained for and expected.
In IES Commercial, Inc. v. Manhattan Torcon a Joint Venture (D. Md. Sept. 26, 2018), the electrical subcontractor on a large federal project at Fort Detrick, Maryland argued that a fire amounted to a cardinal change because the fire changed the subcontractor’s (IES) work on the project from new construction to disaster recovery and reconstruction, which was unexpected. The Court disagreed finding that a cardinal change only occurs when it is the government which imposes the additional obligation. In this case, a fire, not the government, caused the change in work. Equally important, Judge Bennett noted that the parties had entered into a subsequent construction agreement for the fire-related damages. The cardinal change doctrine only occurs when the government unilaterally imposes the obligation, not when the parties agree upon additional work. Finally, he noted, that IES was not left without any rights because IES still had its breach of contract claims against Manhattan Torcon remaining.
If a contractor faces a forced change by the government which seems overwhelming different from the original scope of the contract, before agreeing to undertake the work, contractors should check with counsel first to consider all options and ensure they identify all recoverable costs and consequences.
Can a General Contractor Be Too Demanding?
Most subcontractors can tell horror stories about overbearing general contractors who set unreasonable or unjustified schedule expectations, refuse to recognize delays caused by others, and make unreasonable threats and demands. In a recent case, a federal appeals court held that such actions constituted a breach of contract by the general contractor. The case arose out of a pumping station project for the U.S. Army Corps of Engineers (“USACE”). The subcontractor was hired to engineer and install a “mechanically stabilized earth” wall at the Project. There were significant delays right at the start of the Project caused by weather conditions, scheduling conflicts and unforeseen conditions. None of these delays were caused by the subcontractor.
However, as a result of the delays, the subcontractor was not able to start its work despite repeated requests from the subcontractor to be allowed to start. When the subcontractor was permitted to mobilize to the site, necessary predecessor work was not done and there were only a few days left in the original schedule. The general contractor started threatening delay damages and liquidated damages against the subcontractor just two weeks after it started work and was demanding that the subcontractor complete its work within the original schedule. However, unknown to the subcontractor, the general contractor was notifying the USACE that completion of the project would not occur until the following year and was seeking an extension.
The delays in starting its work caused the subcontractor to lose its intended supplier and the general contractor and USACE started imposing installation tolerances that were outside of industry norms. Ultimately, the general contractor terminated the subcontractor after it had installed 27.5 feet of the 40-foot wall. The general contractor completed the wall with another subcontractor and the work that was performed was not at the tolerances that the original subcontractor was forced to comply with.
The general contractor sued the subcontractor for breach of contract and the subcontractor filed a counterclaim alleging wrongful termination. The court concluded that by threatening to assess delay-related damages without any justification the general contractor was in breach of the subcontract and that the termination of the subcontract was wrongful. The court awarded the subcontractor $215,578.24 in damages.
This case is an excellent example of the old adage that “pigs get fat and hogs get slaughtered.” Just because a contract says you can, all contract actions are balanced against a reasonableness standard.
Tips for Teaming Agreements
Given that the Federal Government is the largest consumer of goods and services in the world, spending approximately $500 million annually through contracts and grants, it is no wonder why many contractors look to break into the government market. However, many contractors do not have the resources to win these competitive contracts on their own. For these contractors, they must enter into agreements with other contractors to competitively bid these government contracts. A Teaming Agreement is a commonly used tool where contractors combine resources to bid on a major government contract. A good teaming agreement covers everything from the exclusivity of the parties on the team to the subcontractor’s compensation and so much more.
Any good teaming agreement should include the following:
- Mutual Confidentiality and Nondisclosure: With the prime contractor and subcontractor sharing proprietary data, technology, and more, confidentiality and nondisclosure obligations must be put down in writing. They should also address survival of confidentiality obligations beyond termination and/or expiration of the agreement.
- Representations: The teaming agreement will define the team members’ exclusive or nonexclusive involvement with the team. The agreement will also cover representations regarding other team member’s resources, performance history and any Organizational Conflicts of Interest which may surface.
- Mutual Indemnification: This clause holds one party harmless for any direct, incidental and consequential costs arising from the other party’s actions.
- No Hire Clause: This prevents either party from hiring the other’s employees for a limited period of time.
- Acknowledgement: Express acknowledgment that the parties are not in a joint venture. The acknowledgement should also cover ownership of intellectual property arising under the performance of the prime contract.
- Assignment: The agreement places clear limitations on assignability of the obligations or notice should a party seek to sell a controlling interest in the company.
- Scope of Effort: The teaming agreement should seek to clearly define the scope of effort which will be given to each team member should the award be made to the prime contractor.
- Subcontract: The teaming agreement should state that a subcontract be entered upon award of the contract to the prime contractor which is at least as inclusive as the terms in the teaming agreement.
- Identity in the Proposal: The subcontractor should ensure that they are expressly identified in any proposals to the Government including its scope of work and any contemplated pricing.
When reviewing a teaming agreement, it is advisable to consult an experienced government contracts law attorney. Ask our Government Contracts group for help.
Want more? Visit the Weekly Wright Report page to browse past issues.