In a landmark decision, the Civilian Board of Contract Appeals (“CBCA” or the “Board”) issued a declaratory judgment finding the Veterans Administration (“VA”) materially breached its contract with the joint venture of Kiewit-Turner (“KT”) by failing to provide a design that could be constructed for $582M as the VA represented would be the contract amount.[i]  As a result, the Board found that KT had the right to stop work on the Project in the middle of performance.

This case provides a solution to the vexing problem faced by a contractor considering the remedy of stopping work due to an alleged material breach of contract by the Owner (government)—i.e., (1) what happens if I am wrong and this is not a material breach; and (2) what happens to my past performance rating and my ability to obtain negotiated government work while the case is being litigated.

The Contract.  The VA entered into what it referred to as an “Integrated Design and Construct” contract (“IDc”) for the construction of a medical campus in Aurora, Colorado.  IDc is similar to what in the private sector is a “construction manager at risk” contract.

The VA also entered into a separate contract with its design team, and the VA retained Jacobs Engineering (“Jacobs”) as its construction manager for the Project.  Notably, the VA had never previously used the IDc-type of contract, and its own management concluded that the “VA culture does not encourage or is [not] comfortable with new approaches.”

In April 2011, when the design was 65% complete, KT’s estimate for construction was $659M, and Jacobs estimated the cost at $678M.  A few months later, the parties agreed that KT would submit a proposal for the construction of the Project in the amount of $603M, which it did.  The proposal contained numerous assumptions and qualifications in part because of KT’s concern that the present design could not be built for $603M.

After substantial discussion, during which KT refused to remove the assumptions and qualifications, the parties reached an agreement on a Fixed Target Price (“FTP”) of $604M with an understanding that the VA would provide a design that could be constructed for that amount.  The parties also established an Estimated Construction Cost and Award (“ECCA”) of $582M.  The difference between the ECCA and FTP was that the FTP included preconstruction and off-site infrastructure work, which were not included in the ECCA.

Construction.  The so-called 100% documents were not provided until August 31, 2012.  Jacobs estimated that the documents were only 80% at that time, and advised the VA that they had included 1,400 design changes in the so-called 100% contract documents.  The incomplete design resulted in an unusually large number of supplemental instructions and RFIs.

KT intended to subcontract 85% of the work on this Project.  As a result of the incomplete design, failure to process change orders, lack of timely payment, and an increase in work in the Denver area, KT found it difficult to obtain bids from subcontractors and the prices were much higher than anticipated.  This resulted in a significant increase in the estimated cost of the Project.

Over time, many estimates were made with respect to the final ECCA.  The estimates ranged from $630M to $1.085B.  The VA did not adopt any of the estimates, but found that regardless of what estimates were used, the cost would be “significantly in excess of the ECCA of $583M.”  While there were discussions of ways to revise the design to bring it within the ECCA’s $583M budget, the VA ultimately decided not to implement any of the changes.  Instead, it directed KT to continue performance and to submit requests for an equitable adjustment for each change from the design that existed at the time the original ECCA budget was established.  The VA also refused to seek additional funding for the Project.

A Contractor’s Dilemma.  If KT continued performance to completion, it estimated it would incur $580M beyond the contract price of $583M, which it would have to finance while pursuing negotiations and possible legal actions.  If KT prevailed, it would likely be many years before it recovered the money.  The issue became, did KT have the right to stop the work in the middle of the Project?  The standard government disputes clause provides that the contractor must proceed with the work pending resolution of any claim.  Courts and Boards have strictly enforced this provision, but have found that, in the event of a material breach of contract, the non-breaching party has the right to discontinue performance.  Here, the VA directed KT to continue work and submit its claim to the contracting officer.  The question was, did the VA’s actions constitute a material breach or was KT required to pursue its claims for extra work through the disputes clause?

Had KT simply stopped the work, the VA very likely would have terminated KT for default.  Even if KT won its appeal of the termination, it would not recover for years and only after extended and costly litigation.  Further, the high-profile termination would affect both Kiewit and Turner’s past performance ratings on future government contracts.  KT also faced the reality that the result in litigation is never certain.

The Declaratory Judgment.  Rather than face the risk and consequences of stopping the work, KT filed a declaratory judgment action asking the Board to find the VA had materially breached the contract and that KT had the right to stop work.  The Board found in favor of KT.  It found that it would cost at least $200M more to complete the Project, that this would be a cardinal change, and that KT would ultimately be a long-term banker for the VA while KT pursued its claim before a contracting officer who allegedly had inadequate funds allocated to cover the costs.  The Board found further that KT’s legal remedy was inadequate and that KT had a special need for an early interpretation of the contract.  The Board then held expedited hearings and granted KT’s request for declaratory relief.  The Board found as follows:

  • The VA unequivocally agreed to produce a design that could be constructed for $582M.
  • The parties knew at the time the ECCA was established that design changes would be required.
  • Not only did the VA not reduce the costs of the Project, its failure to timely process change orders and its untimely payments increased the costs.
  • KT was not provided a design that could be constructed for the amount of $582M.
  • The parties cannot determine the difference in cost of construction between the initial contract amounts and the final set of contract documents because an initial design was never provided.

The Board, thus, concluded that the VA’s failure to provide a design which could be constructed for $582M was a breach of contract.  It ruled that the VA’s breach went to the essence of the contract and, therefore, constituted a material breach.  Further, the Board found that the VA failed to meet the standard of good faith and fair dealing.

Comment:  The facts of this case are unique and will not appear often.  The decision of the Board does, however, offer several useful pointers for future reference.  First, the Board reinforced the right of a contractor to stop working in the event of a material breach of contract, whether it is due to a cardinal change, breach of good faith and fair dealing, or the failure to comply with an unambiguous contract term that is the essence of the bargain.  Second, the Board’s willingness to issue a declaratory judgment interpreting the contract during performance provides a remedy not normally pursued by parties in federal government contracts.  Contractors and lawyers should keep this case in mind when they are faced with the dilemma as to whether to stop work or not. The courts can provide “air cover” in a declaratory judgment action to lessen the impact or consequence of making the wrong decision.

P.S.:    On April 8, 2015, the Daily Journal of Commerce reported that the Corps of Engineers has now taken over the management of the Denver VA Hospital Project, which is estimated to cost $1.73B.[ii]  Apparently, the VA’s top construction executive has “retired” amidst an investigation as to what occurred in this case.  Members of Congress are suggesting that the top executive, Glenn Hegstrom, should have been fired rather than allowed to retire.  Hegstrom was unavailable for comment.  It is disappointing to read that there is so little government accountability when a project goes so wrong and costs taxpayers so much money.

[i] Kiewit-Turner, a joint venture v. Dept. of Veterans Affairs, CBCA 3450 (Dec. 9, 2014).  Thanks to Adrian L. Bastianelli, III of Peckar & Abramson, P.C. for bringing this case to our attention and for his synopsis from which this blog is drawn.

[ii] The Daily Journal of Commerce, “Corps Takes Over Construction Management of Denver VA Hospital That is $1B Over Budget,” April 8, 2015.

Scroll to Top