July 06, 2020 article

Prime Contractor's Ebola Delay Damages Claim Provides A Cautionary Tale of COVID-19 Claims

Shiva S. Hamidinia

The year 2020 marked the beginning of adverse impacts to federal construction projects worldwide, including to their supply chains, as a result of the COVID-19 global pandemic.  The contagion of coronavirus has had much of the United States on lockdown from March through June 2020.  The resulting fallout from this public health crisis has markets reeling and millions of businesses losing income.  The novel conditions and complications of COVID-19 have created an unprecedented environment.  For those working in the construction industry, many projects are on pause or restricted to protect the health and safety of their worksite personnel and prevent the further spread of a contagious and unpredictable disease.  The unanticipated adverse impacts to construction schedules, shortages of the labor force and materials, and increased costs to perform and complete work efficiently may continue to have a ripple effect in the months to come. 

Two recent Civilian Board of Contract Appeals cases shed some light on how the boards may receive contractor claims for inefficiencies, delays, and increased costs of operating in the COVID-19 pandemic environment. 

Pernix Serka Joint Venture, CBCA 5683 (Apr. 22, 2020)

Pernix Serka Joint Venture, CBCA 5683 (Apr. 22, 2020) provides a useful interpretation for federal contractors who are considering submitting certified Contracts Dispute Act (CDA) claims or requests for equitable adjustments (REAs) to increase the time and/or costs for completing a federal project under pandemic conditions.  The opinion forecasts how the boards of contract appeals may interpret and apply the relevant Federal Acquisition Regulation (FAR) clauses to resolve a contractor’s (or a sponsored subcontractor’s pass through) CDA claims for additional performance costs as a result of a pandemic. 

The Department of State (DOS) awarded the contract for a firm-fixed-price of $10.8M, to include all labor, materials, equipment and services needed to complete the project as defined in the solicitation.  The project was to construct a rainwater capture and storage system in Freetown, Sierra Leone.  DOS awarded the contract in the fall of 2013.  By the spring of 2014, the Ebola outbreak started in the Republic of Guinea.  By July 2014, the Ebola virus spread to the seat of the project in Freetown, Sierra Leon.  By the end of July 2014, the contractor became concerned about the spread of the virus to its personnel and requested guidance from the project Contracting Officer (CO). 

The project CO did not respond to the Ebola outbreak or the contractor’s inquiry with any direction, suspension of work, or stop-work order.  The CO’s response was that because the project owner had not issued an ordered departure for the Embassy, it could not tell the contractor to leave the project due to the Ebola conditions.  The communications from the CO essentially left it up to the contractor to decide whether to stay or leave the project for life-safety reasons.

As the threat of the Ebola virus escalated, the contractor decided that it could not leave a small work crew behind, arranged for a temporary site shut down and evacuation of expats and personnel from Sierra Leone, and gave notice of its decision and intent to later claim its additional performance costs to the CO.  The CO responded that because the contractor took these actions unilaterally, the contractor had no basis upon which to properly claim an equitable adjustment from the government. 

Eventually, the DOS CO granted the contractor additional time (195 days) for the delays to the project resulting from the Ebola virus.  The CO, however, denied the contractor’s damages claim for the increased costs to implement additional life safety and health provisions, and to demobilize and remobilize the site to complete the construction work within the adverse conditions of the Ebola virus.  On appeal to the CBCA, the CBCA agreed with the CO’s determination and granted the DOS’s motion for summary judgment denying the contractor’s claim.

In granting the DOS’s motion for summary judgment, the CBCA provides useful interpretation of the contract and FAR clauses incorporated in the firm-fixed-priced construction contract.  The contract contained the following clauses:

F.8.1 The Contractor will be allowed time, not money, for excusable delays as defined in FAR 52.249-10, Default (see Section/Paragraph I.153). Examples of such cases include (1) acts of God or of the public enemy; (2) acts of the United States Government in either its sovereign or contractual capacity; (3) acts of the government of the host country in its sovereign capacity; (4) acts of another contractor in the performance of a contract with the Government; (5) fires; (6) floods; (7) epidemics; (8) quarantine restrictions; (9) strikes; (10) freight embargoes; and (11) unusually severe weather.

Applying the contract’s no damages for delays clause, the CBCA held that under a firm-fixed-priced contract, the contractor bears the additional cost of contract performance as a result of an unforeseen pandemic, even if the contractor did not contemplate those measures at the time it submitted its proposal or at contract award.  Because the government ordered no direction, the CBCA ruled that the contractor’s decision to demobilize in response to the Ebola pandemic was its own action and choice.  The CBCA held that because the government did not order or give any directions to the contractor on how it should respond to the ongoing outbreak and left the decisions solely in the hands of the contractor, the changed conditions were not the government’s fault and, therefore, were non-compensable delays.  Moreover, the addition of safety measures after remobilization did not alter the nature of the work contracted for and was not a “cardinal change” (i.e., one so drastic that it effectively required the contractor to perform duties materially different from those found in the original contract).  The CBCA also rejected the contractor’s “constructive suspension of work” theory because the contractor did not raise the operative facts and theories in its certified claim; therefore, the Board decided that it lacked jurisdiction to consider the claim.

Valerie Lewis Janitorial v. Department of Veterans Affairs, CBCA 4026 (May 5, 2020)

The Civilian Board of Contract Appeals reached a different and positive conclusion for a contractor’s constructive change order claims in the case of Valerie Lewis Janitorial v. Department of Veterans Affairs.  This opinion ruled favorably on behalf of a contractor’s equitable price adjustment claim for additional cleaning costs that the agency directed it to perform following a C. diff outbreak at the facility. 

The VA awarded Valerie Lewis Janitorial a firm-fixed-price contract to provide janitorial and hospital aseptic maintenance services at the VA Northern California Health Care System, Martinez facility in the amount of $5,158,632 (for the base year and four option years).  The contract pricing was based on prescriptive requirements in the performance work statement detailing the nature, frequency, and methods of cleaning the various rooms of the buildings in the VA facility.

During contract performance, an outbreak of clostridium difficile (C. diff) occurred in the Center for Rehabilitation and Extended Care (CREC) building, which consisted of three patient-care wings.  To control and kill the C. diff spores, the Contracting Officer’s Representative directed the contractor to use bleach for disinfection for residents and then 48 hours later add a new two-step aseptic process of cleaning and disinfecting.  The contractor gave notice to the CO that the additional cleaning required by the agency to control the outbreak required new cleaning products (bleach) and the additional labor to perform the two-step cleaning process.  The government issued a written modification to the contract to implement the two-step process; however, the parties could not agree on the amount. 

During the CBCA litigation, the VA took the position that the modification was at no-cost to the government, and the contractor was not entitled to any additional compensation.  The CBCA rejected the VA’s argument.  Utilizing the jury verdict method, the CBCA determined the VA’s own internal estimate of the additional cost of materials and labor was the proper measure of recovery for the contractor’s constructive change claim.  The CBCA held that to establish a constructive change, two essential elements must be present: a change and an order or direction, by word or deed. To find the change, the actual performance must go beyond the minimum standards demanded by the terms of the contract. The change must also be one that the Government’s representative ordered the contractor to perform.  The CBCA importantly held that the rejection of a method or manner of performance selected or used by a contractor is a constructive change if the method was permitted by the contract.

Reiterating the standard expressed in the Court of Federal Claims, the CBCA held that ascertaining damages for an equitable adjustment is not required to be an exact science.  The CBCA ruled that the government’s own internal estimate was an appropriate measure for damages, estimated as 9.2 additional labor hours per day for seven days a week, at the GSA’s labor rates for janitorial services, including overhead and profit.  The damages award also included the additional cost for new supplies (such as bleach, in addition to overhead and profit on these costs).  Ultimately, the board arrived at “a fair approximation” of the damages of $179,049.48 for two years of additional work.

Lessons Learned:

Following this pandemic, it is unlikely that construction contractor can quickly return to business as usual.  Indeed, procurements and solicitation terms cannot ignore the fundamental changes that the coronavirus has inflicted on the environment in which contractors will be operating.  Construction contractors, therefore, should be extremely cautious in their submission of bids for projects to ensure that technical and price proposals factor the increased and added risk and costs of operating in a COVID-19 environment for months to come.  Contractors must also ask detailed questions during a solicitation regarding any contract requirements which fail to address operations in the current and potential future pandemic environment.  If the government’s pre-award Q&A responses are vague and non-committal, or solicitation terms fail to offer enough specifics to permit fair and intelligent competition, contractors should consider filing a pre-award protest, either with the agency or at the Government Accountability Office, where appropriate.

Understanding the interplay of the various FAR clauses that may be incorporated into a construction contract is essential to preserving and presenting valid claims to the government.  The Pernix decision ultimately found that a pandemic and the contractor’s own decision to stop work as a result of such a pandemic is not the government’s responsibility.  Although not evaluated by the CBCA, because the contractor did not raise this theory in its certified claim, the CBCA did not evaluate the potential for economic recovery for delay damages resulting from a pandemic under a constructive suspension claim.  The decision highlights the importance of the contractor’s certified claim as the foundation for the contractor to assert all of the operative facts and theories of recovery for the CO’s final decision.  Without a CO’s final decision on a claim, the boards and the Court of Federal Claims may lack jurisdiction to hear and decide the matter. 

However, a Contracting Officer Representative’s specific directions going above and-beyond the government’s contract requirements can serve as basis for an equitable adjustment claim.  In particular, interfering with a contractor’s means and methods by rejecting a method or manner of performance selected or used by a contractor is a constructive change if the method was permitted by the contract.

In Valeri Lewis Janitorial, the contractor immediately notified the Contracting Officer that the demands for extra cleaning were causing the contractor additional labor and materials expenses and that although the contractor tried to mitigate its costs, the two-step process ordered was more time consuming and costly in manpower and materials expenses.  The contractor assured the CO that they would follow the additional cleaning orders “to a tee” but that it would as a result have to increase manpower and submit a request for equitable adjustment.  The parties continued to communicate in writing and the contractor insisted on a written modification from the Contracting Officer.  With persistence and an open line of communication, the Contracting Officer finally agreed to issue a written modification, acknowledging the changes to the contract, although the matter still ended in litigation because the parties could not agree on the amount owed to the contractor.

Ultimately, delays resulting from an unprecedented pandemic such as COVID-19 may only entitle an adversely impacted construction contractor to additional time, not additional compensation, without specific directions from the agency to perform more work than that which was called for in the contract.  Where possible, contractors should reach agreement with the agency on all change orders through written modifications and contract amendments.  Moving forward, the risk of additional COVID-19 expenses should be raised with the agency before bidding future work. 

CARES Act and Other Agency Guidance:

Although there is more guidance available now with the coronavirus pandemic than in the case of the Ebola pandemic, the relevant word is “guidance.”  Section 3610 of the Coronavirus Aid, Relief and Economic Security (CARES) Act permits an agency CO the discretion to reimburse contractors for their costs to keep employees and subcontractors in a “ready state” if they are currently unable to perform work due to COVID-19.  This would apply, for example, to a construction contractor’s workforce, unable to report to work due to restricted access to the site.  For firm-fixed-price contracts, DOD’s guidance recommends that Contracting Officers should establish a separate contract line item number (CLIN) for Section 3610 payments to keep personnel in a “ready state” to pick up contract performance after the pandemic subsides and COVID-19 restrictions are lifted. DOD’s guidance also states that Contracting Officers may require supporting documentation to “identify and explain why claimed hours could not be worked, along with a statement that these costs are not being reimbursed under other authorities.”  For now, though, one thing is abundantly clear: Government agencies are not responding to contractors in a uniform and consistent fashion; there are no clear, mandated directives. 

Contract Relief:

1. Read the Contract

Absent such guidance, contractors and subcontractors must refer to the terms of their contracts.  Most courts, boards, and arbitration panels will hold the parties to the unambiguous terms of their contracts, no matter how inequitable the result.  Read your contract to confirm what guidelines govern the situation and whether any of the following FAR clauses are referenced or flowed down:

2. Provide the CO Timely Notice of a Potential Time or Delay Damages Claim

The Excusable Delay Clause, FAR 52.249-14(a), excuses a contractor, except for defaults of subcontractors, for failing to perform if the failure “arises from causes beyond the control and without the fault or negligence of the Contractor.”  Included in the clause are specific examples, including “acts of God”; “acts of the Government in either its sovereign or contractual capacity”; “epidemics”; “quarantine restrictions”; and “freight embargoes.” This clause, however, will permit the contractor additional time to complete performance, not additional compensation.  Notice of a time impact claim must be furnished to the CO within 10 days. 

Notice is also required for constructive and directed suspensions.  For directed suspensions, a claim, in a sum certain, must be asserted in writing “as soon as practicable” after the suspension, delay, or interruption, but not later than the date of final payment under the contract.  In the case of a constructive suspension, the notice requirement has a quicker turn-around time.  A contractor must submit its notice in writing of its claim for added costs incurred within 20 days from the date that the work is suspended, delayed, or interrupted for an unreasonable period of time.  Constructive suspensions can only claim damages for suspensions, delays, or interruptions that were prolonged for an “unreasonable period of time.”  The Suspension of Work Clause specifically excludes profit; therefore, profit cannot be claimed as a part of the contractor’s damages.

The Stop-Work Order Clause and the Changes Clause require written notice of any claim to be submitted to the CO within 30 days of the work stoppage or receipt of a written/or directed change order.  The Stop-Work Order clause requires the CO to make an equitable adjustment in the delivery schedule or contract price, or both, if the stop-work order results in an increase in the time or costs of the contractor’s performance of the contract.

3. Keep the Lines of Communication with the CO Open and Document … Document … Document

Contractors should submit a request for equitable adjustment (REA) in a timely manner if their covered employees cannot report to work or work remotely as a result of COVID-19.  For firm-fixed-price contracts, Contractors should obtain the CO’s advanced agreement on a minimum reimbursable daily rate (or hourly rates) for keeping the contract workforce in a “ready state” until COVID-19 restrictions are lifted.   New and detailed cost codes should be established to track all COVID-19 adverse impact costs, including coding employees to as granular a level of detail as possible.

Contractors should encourage their COs to issue a modification to the contract reflecting the negotiated adjustment in contract price (or new CLIN) to pay the contractor’s employees to remain on standby during COVID-19 restrictions to the worksite.  Invoicing to the government should continue on a regular basis, including invoicing the agreed rates for the “standby” workforce while work is suspended during COVID-19.  Efforts to mitigate losses, including reassigning employees to other projects, where possible, should be documented, filed, and furnished to the CO to support the contractor’s claim.  To the extent that any other relief, including tax relief under the Paycheck Protection Program, overlaps, a contractor should offset those amounts gained from the total amount claimed from the government.

Final Thoughts:

Government prime and sub- contractors presently experiencing adverse impacts to performance as a result of COVID-19 must take steps to provide timely notice and support of their extension of time and price adjustment claims. 

The Pernix case emphasizes that the government must be responsible for the suspended work and that the contractor’s own decision to shut down the site to protect the health and safety of its workers is not the government’s responsibility.  Ultimately, the contractor lost its delay damages claim for additional compensation as a result of operating in the pandemic environment because the government never issued a written order to the contractor to stop or suspend the project, and the contractor’s constructive suspension of work theory was not presented as a certified CDA claim to the contracting officer.

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Shiva S. Hamidinia

Nichols Liu LLP Washington, DC, Division 13 (Government Contracting)