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March 12, 2024 Feature

Hard Hat Case Notes

Hugh D. Brown and Lauren P. McLaughlin

Contractor Unable to Prove Differing Site Condition

The question of who bears the risk of differing site conditions (DSC) on a construction project is often litigated. Most cases discussing DSC disputes center upon what formed the basis for the alleged DSC. Moreover, most of the time there is some affirmative representation in the contract that led the contractor to expect certain types of conditions, but when the contractor started construction work, it found conditions that were materially different. The “fight” is typically whether (a) the contractor’s expectations were justified based on a reasonable look at the contract documents or (b) a more robust prebid investigation by the contractor would have revealed the conditions the contractor found.

There are some DSC cases, however, that discuss what happens when the contract documents are silent on a particular condition. These cases create a challenge for contractors because contractors need to justify how they arrived at their prebid expectations and why the owner should be responsible for the conditions they actually found. The recent case of Slone Associates, Inc. v. United States highlights how difficult it is for a contractor to prevail on these types of claims.

Slone Associates, Inc. (Slone), had a multiple-award construction contract with the U.S. Navy for work in South Carolina and Georgia. In 2010, the Navy issued a $5.43 million task order to Slone that involved repairs on a concrete dock located at the Naval Weapons Station in Charleston, South Carolina. The repair work primarily involved the demolition of portions of the existing concrete pile-supported deck and the installation of additional concrete piles and new concrete decking. Because Slone did not have expertise with heavy marine construction work, the work at issue was performed by Precon Marine, Inc. (Precon), a sub-subcontractor to Slone.

The project experienced numerous delays and DSC claims, many of which were recognized by the Navy through contract modifications. However, one area of contention that was not resolved involved timber stubs that were the remnants of an old wooden pier. During a post-construction inspection, the Navy discovered that two of the new concrete piles that Precon installed were cracked. Slone and Precon eventually asserted that the cracks were caused by the piles having contact with the timber piles. The direct cost of removing and replacing the piles was approximately $450,000 and 169 days of delay were attributed to this remedial effort.

Slone argued that the timber piles and their impact on the concrete piles constituted both a Type 1 and Type 2 DSC. Slone included these assertions as part of an overall claim to the Navy. When the Navy’s contracting officer failed to render a final decision on the claim, Slone filed a complaint with the U.S. Court of Federal Claims. The court ultimately found that Slone did not prove that there was either a Type 1 or Type 2 DSC and denied the claim.

The court cited longstanding precedent stating that to prevail on a Type I DSC, a contractor must first establish that “a reasonable contractor reading the contract documents as a whole would interpret them as making a representation as to the site conditions” and that a contractor “is not eligible for an equitable adjustment for a Type I [DSC] unless the contract indicated what that condition would be.” The DSC remedy is not available if the contract documents “say nothing one way or the other about the unforeseen conditions.” Citing other precedent, the court stated that if the contract is truly silent about the conditions, there is nothing as a baseline to use to compare against the actual conditions and show how they are materially different.

Based on this analysis and the specific facts of the case, the court concluded that Slone had failed to show that the contract affirmatively indicated that a contractor would not encounter timber pile stubs or other remnants of an older structure. In fact, Slone could not cite to any contract provision or drawing that made any representations about subsurface conditions.

Slone relied upon the testimony of Precon’s project manager, who stated that he would have expected to see the timber piles that Precon encountered reflected in the contract drawings when Slone bid on the work. Because there were no obstructions noted in the drawings, Precon assumed that the work area was a virgin area and that there would be no obstructions. While the court found his testimony credible, the court held that this position “collides with the law, under which establishing a Type 1 differing site condition requires affirmative indications, as opposed to implications drawn from contractual silence.”

Slone cited several federal court cases where Type 1 DSCs were recognized based on implied, rather than affirmative, representations about a site condition. In these cases, the presence of some subsurface conditions was identified in the contract documents, but there was nothing said about those that were the basis for the DSC claim. The court found these cases distinguishable because the contract documents on Slone’s project said nothing at all about subsurface conditions.

The court then turned to the question of whether the timber piles could be considered a Type 2 DSC—i.e., were the timber piles of an unusual nature and did they differ materially from what would normally be encountered in the kind of work contemplated by the contract? The court cited longstanding precedent to explain that Type 2 DSCs are more difficult to prove and have a heavier burden of proof than Type 1 DSCs. The court concluded that Slone failed to meet that burden. The court noted that the timber piles were predominantly found in one small section of the project site, and only 16 percent of the piles driven by Precon hit timber obstructions. These obstructions were removed without any material delay in the contractor’s performance.

Finally, the court stated that even if it had determined that the timber piles did constitute a DSC, Slone failed to prove that they caused the cracks in the two concrete piles. The only evidence of causation was from Precon’s project manager, who speculated that the problems in those two piles resulted from the timber. He also could not explain why Precon was able to drive all the other concrete piles without cracking them despite the presence of timber piles.

Authors’ Comments

Among the most important takeaways from this case is the court’s discussion of Slone’s failure to prove that the cracks in the new concrete piles were caused by the alleged DSC (i.e., the timber piles). Far too often, a contractor will focus its attention on proving the first part of its burden—the existence of the DSC condition itself—to the exclusion of proving the second part of its burden, causation. Whether the impact claimed is project delay, loss of productivity, or, as in the case here, a discrete damage to an element of the work, causation is a crucial element for recovery. This case is an important reminder that contractors face a two-prong burden of proof and must satisfy both prongs—the DSC itself and the effect of that condition.

Slone Associates, Inc. v. United States, 166 Fed. Cl. 771 (2023).

Liquidated Damages Assessment by Owner Overturned by Georgia Appellate Court

Liquidated damages (LDs) can be a mechanism to compensate an owner for an untimely completion as well as other types of breaches. On some large projects, contracts require the payment of LDs if the contractor fails to keep its key personnel on the project. On some industrial projects, LDs are used to compensate the owner for a shortfall in a performance guarantee, such as guaranteed electrical capacity for a power project. However, even though the contract may establish LDs for a given issue, enforceability of the rate or clause is sometimes disputed. There are some common rules associated with recovering LDs, and the party seeking to recover LDs has to prove entitlement. In the case of City of Brookhaven v. Multiplex, LLC, the court discusses the effects of a party’s noncompliance with the LD contract provision.

The City of Brookhaven (City) contracted with Multiplex LLC (Multiplex) for the construction of a new park and elementary school. The contract had a delay clause entitling the owner to LDs in the amount of $1,000 per day. The project fell behind schedule and the City notified Multiplex that it was in breach of the contract’s timeline for completion. The City also warned Multiplex that it would enforce the delay clause if the project was not completed timely.

After the project was substantially completed, the City filed suit in state court against Multiplex, alleging that Multiplex delayed the project by 271 days and that the City was entitled to LDs in the amount of $271,000. Multiplex argued that the delay clause was unenforceable and filed a motion for summary judgment on the City’s LD claim. The trial court agreed with Multiplex and granted the motion. The City appealed to the Court of Appeals of Georgia.

The appeals court cited to Georgia law, which states that parties are free to agree in their contract what the damages for a breach shall be and, “unless the agreement violates some principle of law, the parties are bound thereby.” In assessing whether the LD clause violated some principle of law (i.e., was unenforceable), the court recited the three-factor test under Georgia law: (1) the injury must be difficult to estimate accurately, (2) the parties must intend to provide damages instead of a penalty, and (3) the LD must be a reasonable estimate of the probable loss.

The court stated that Multiplex had the burden of proving that the LD clause was an unenforceable penalty. However, Multiplex could meet this burden by proving that any of the three factors was lacking. Multiplex did not contest the first factor but argued that the second and third factors had not been met. The appeals court agreed with Multiplex and found the LD clause was unenforceable.

As to the second factor, the court examined the contract language to determine the intent of the parties regarding the purpose of the LD clause. The court observed that the clause lacked any language indicating that the $1,000/day LD amount was not intended to be a penalty. While this determination was not dispositive of the issue, the court stated that the absence of such language enabled the court to consider evidence about the effect the provision was intended to have.

After examining the evidence, the court concluded that the LD clause was inserted into the contract for the purpose of deterring Multiplex from breaching the contract and was therefore a penalty. The key evidence was deposition testimony from the City’s designated representative. The representative testified that timely construction of the new park was important because the old park would have to be demolished before construction could start on the new elementary school, and residents in the area would have to go to other parks outside of their neighborhood area to recreate if the new park was still under construction. The representative agreed that the intent of the delay clause was to “disincentivize delays” with the project because Multiplex was “going to have to pay $1,000 a day out of their net profits if they don’t get the project done on time.”

As to the third factor, the court found that the LD clause failed because there was no evidence that the $1,000/day amount was a reasonable estimate of the probable loss resulting from a delay in construction of the park. The court noted that “the touchstone question is whether the parties employed a reasonable method under the circumstances to arrive at a sum that reasonably approximates the probable loss.”

The City offered no evidence that it had made a reasonable pre-estimate of the probable loss prior to the execution of the Multiplex contract. Instead, it argued that the LD clause should be upheld because the LD amount per day was less than 0.0004% of the $3 million project cost. The City also argued that LD clauses are “very” common in its construction contracts and that the $1,000/day amount was not project specific but was instead a “standard” number.

Because there was no evidence that the City had reasonably pre-estimated the $1,000/day amount, the court found that the LD clause was unenforceable. In fact, the court cited the City’s “standard” number argument as evidence that the City had not pre-estimated the damages and that the $1,000/day amount “plainly has no reasonable relation to any probable actual damage which may follow a delayed completion of the project.”

Authors’ Comments

Almost every state has legal precedent similar to the three-factor test expressed in the Brookhaven case. This means, among other things, that in order for a party to overcome a challenge on an LD amount, there should be something in the pre-contract record that explains how the LD dollar value and formula were developed and why they were reasonable. One interesting takeaway concerns the question of the party’s intent—i.e., was the clause truly a measure of damages or there to incentivize the contractor to finish on time? Many well-drafted LD clauses will expressly say that the LDs are not considered a penalty. However, this case demonstrates what happens if a court sees evidence that the clause was intended solely as a “stick” to prod the contractor to finish on time.

City of Brookhaven v. Multiplex, LLC, 891 S.E.2d 60 (Ga. Ct. App. 2023).

Federal Contractor Unable to Prove Entitlement to Three-Year Delay Claim

There are times when a contractor believes its right to a time extension is so well-known by the parties that it does not need to support its claim with a typical scheduling analysis. This can occur when the contractor believes that the owner is on the same page as to why the project has been delayed. Appeal of Wright Brothers, The Building Company, Eagle LLC addresses how a contractor thought it had an understanding with the federal government that it was entitled to a three-year time extension and compensation, only to lose the case entirely.

The disputes arose on a $3.8 million construction project for the repair and renovation of a building at Minot Air Force Base, in North Dakota; the project was to be completed in 365 days. The project was completed 1,021 days late. The Air Force issued contract modifications for 986 days and had also paid Wright Brothers for some delay-related costs. However, because the project was completed late for reasons the Air Force attributed to Wright Brothers, the Air Force charged 35 days of liquidated damages. The Air Force also denied Wright Brothers entitlement to approximately $450,000 in delay-related costs.

Wright Brothers filed a request for equitable adjustment that was denied in large part by the Air Force’s contracting officer in its final decision. Wright Brothers appealed that final decision to the Armed Services Board of Contract Appeals (ASBCA). The parties agreed that the appeal would be heard based on the submissions of briefs and declarations from witnesses, and without a hearing.

Wright Brothers’s appeal was primarily on the costs it had incurred because of the claimed Air Force delay. It submitted essentially the same papers that it had provided to the Air Force over the course of the project, which were largely based on the report of its claims expert. Wright Brothers argued that the “existence of delay to the overall Project and the Government’s acceptance of the vast majority of the delay is not disputed.” It attributed government delays to the failure of the Air Force to (a) allow Wright Brothers site access; (b) timely respond to requests for instruction and requests for information; and (c) approve contract submittals. Because “the Government accepted responsibility for 97% of the additional time the job required [this] is ample proof alone that [Wright Brothers] is not responsible for the costs it had incurred.”

Wright Brothers asserted that the Air Force “acknowledged and accepted” these delays as its responsibility when it issued contract modifications. The 97 percent figure was derived from 986 days of modifications versus the 1,201 days of delay; but other than that math, Wright Brothers did not explain how the Air Force acknowledged and accepted responsibility for 97 percent of the delay. Wright Brothers’s expert did not perform a CPM (critical path method) analysis and Wright Brothers stated that one was not required because, “[i]n this case, the amount of excusable and/or compensable delay was determined through the Government granting time extensions due to its actions.”

The Air Force stated that it did not accept any responsibility for Wright Brothers’s cost overruns. It stated that the contract modifications only identified “government delays” for no more than 246 days out of the 1,021 days, which was less than a quarter of the total days of delay identified by Wright Brothers. For these delays, the Air Force had already paid Wright Brothers for its delay-related costs. With respect to the “modifications that did not refer to government delays,” the Air Force stated that “the mere grant of a contract extension does not establish that the government was responsible for the delay.”

The Air Force also argued that Wright Brothers was obligated to demonstrate that any alleged claim for a compensable time extension had to be based on a showing that the Air Force was at fault and delayed the critical path. The Air Force cited prior case precedent to support this position; Wright Brothers failed to provide a rebuttal to this.

The ASBCA started its assessment by looking at the applicable case law on delay claims. It cited longstanding precedent holding that a contractor seeking to prove the government’s liability for a delay had to establish (i) a causal link between the government’s wrongful acts and the delay to the contractor’s performance and (ii) harm to the contractor for the delay. “To establish that causal link, the contractor must show that the government’s actions affected activities on the critical path of the contractor’s performance of the contract.” The ASBCA stated that “broad generalities and inferences” that the government must have caused some delay and damage because the contract took longer to complete than anticipated are not sufficient.

In applying that precedent to this case, the ASBCA concluded that Wright Brothers failed to meet its burden of proof. Although Wright Brothers provided a litany of alleged delays and disruption, its request for compensation was based on the combined effect of the numerous delays due to the Air Force’s actions that allegedly changed the project from a one-year to a four-year duration. In doing so, however, Wright Brothers “has provided no context to support a finding that the alleged delays and disruption ran through the project’s critical path, and, as such, appellant has failed to meet its burden of proof.”

The ASBCA was influenced by the fact that Wright Brothers had already been paid for some delay damages. In the board’s view, this amplified Wright Brothers’s duty to establish an impact to the project’s critical path because Wright Brothers needed to demonstrate that it had not already been paid for costs that it was claiming. The ASBCA stated, “As an adjudicative body, it simply is not our role to piece together a contractor’s allegations of delay and disruption to determine their impact upon the contractor’s performance.”

The ASBCA rejected the opinion by Wright Brothers’s expert that a CPM analysis was not required because the Air Force had granted time extensions. The ASBCA concluded that Wright Brothers not only had to establish that the Air Force’s actions affected activities on the critical path, but also that “delays of the parties were not otherwise concurrent or intertwined.”

Wright Brothers also raised other theories in support of its position, including that the conversion of the project from a one-year to four-year project was a cardinal change. The ASBCA held that Wright Brothers failed to prove this claim with the necessary level of specificity and that Wright Brothers only provided generalities about the project growing in duration. The ASBCA concluded, “Again, it is not the responsibility of the Board to provide, in the first instance, [Wright Brothers’] factual and legal analysis. … “We won’t do [Wright Brothers’] work for it.”

Authors’ Comments

While there was extraordinary growth in contract duration, there was little, if anything, in the opinion that pointed to Wright Brothers as having contributed to the delays. However, given the substantial precedent in federal contracting that a CPM analysis is needed to prove a delay claim, it is unsurprising that Wright Brothers was unable to prevail on its ASBCA appeal without such an analysis. The decision addressed some of the reasons why the ASBCA required a CPM analysis, including the need to identify potential concurrent delays. The reason this is important is that if there is a concurrent delay, the contractor is entitled to a time extension, but not to any delay damages. Consequently, the mere fact that an owner extends the contract completion date does not automatically mean that the contractor is entitled to compensation. Because this appeal principally concerned Wright Brothers’s request for compensation, it had to do more than just prove there was a time extension warranted.

Wright Bros., the Bldg. Co., Eagle LLC, ASBCA No. 62285, 23-1 BCA ¶ 38,255, at 185,777.

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Hugh D. Brown

Fabyanske, Westra, Hart & Thomson, P.A

Hugh D. Brown is a shareholder at Fabyanske, Westra, Hart & Thomson, P.A., in Minneapolis, Minnesota.

Lauren P. McLaughlin

Smith, Currie & Hancock LLP

Lauren P. McLaughlin is a partner at Smith, Currie & Hancock LLP in Tysons, Virginia.