Federal Contractor Has No Claim Against the Government When State Agency Disrupts Construction

Contractors often mistakenly believe that events and conditions beyond their control on a construction project are compensable.  Construction contracts are risk-shifting documents.  The terms and conditions of the contract control which party bears the risk for such things as differing site conditions, weather, and interference by outside third parties.  In most contracts, weather delays are not compensable; however, differing site conditions are generally compensable in most public and many private contracts.  When an outside state agency interferes and disrupts the construction project, the entity that bears the risk for that event is controlled by the terms of the contract.

In the following case, a federal contractor made certain assumptions concerning the method and manner of excavating a federal project that were inconsistent with the state agency’s idea of how the project should be performed.  The state agency severely restricted the contractor’s method and manner of performing the work, and the contractor’s claim against the government was, to the contractor’s surprise, denied.

In Bell/Heery, a Joint Venture v. United States, a federal contractor submitted a design-bid proposal for the Federal Bureau of Prisons in the amount of over $238 million.  739 F.3d 1324 (2014).  The government’s Request for Proposal (“RFP”) indicated that the project involved a balanced site; in other words, the soil for the project had to be made level by excavating (or “cutting”) materials from one area of the work site and using those materials to fill the lower areas (“cut-to-fill”).  The contract mandated that the cut-to-fill operations be performed in compliance with New Hampshire’s environmental regulations.  The RFP’s specifications also indicated that the New Hampshire Department of Environmental Sciences had jurisdiction over this site as if it “were not constructed by a federal agency.”  The contractor was told to read and comply with the terms and conditions of applicable permits.  Finally, the Federal Acquisition Regulations (“FARs”) indicated that the costs associated with obtaining permits were allocated to the contractor without expense to the government.

The contractor submitted its bid with a construction plan that assumed that it would be granted a permit for cut-to-fill operations that would occur in a single step.  The entire site would be open and materials could be directly transported to their final location without interruption.  After the contractor was awarded the contract, it applied for the state permits to begin the cut-to-fill operations and learned the New Hampshire Department of Environmental Sciences would only authorize the contractor to cut-to-fill operations in limited 40-acre disturbance areas.  Since the contractor could only cut-to-fill on that 40-acre section, instead of having a single step cut-to-fill plan, multiple steps were needed, which significantly increased the contractor’s cost of performance.

The contractor notified the government that the state agency’s permit requirements significantly affected the method, manner, and duration anticipated in its bid.  The contractor alleged that during the partnering meetings, the government had advised it that the contractor would be “treated fairly with respect to extra work caused by the [environmental restrictions].”  The contractor submitted a claim based on breach of contract, breach of the implied covenant of good faith and fair dealing, and for relief under the doctrines of constructive and cardinal changes.

The U.S. Court of Appeals for the Federal Circuit framed the central issue as how the contract allocated the risk between the government and contractor for compliance with the environmental permits.  The Court found that the burden of obtaining and complying with the state and local permits for the construction project was with the contractor.  The government did not control the actions of the state environmental agency; therefore, there was no basis for imposing liability for constructive or cardinal changes on the government.  The Court also found that the government was not obligated under the terms of the contract to undertake any actions with respect to the permits during the project’s construction.  Thus, the government did not breach its duty to cooperate and work with the contractor because it had no obligation with regard to the permits.  As far as the breach of the covenant of good faith and fair dealing is concerned, because the implied duties do not form the basis for new contract terms – particularly terms which would be inconsistent with the express terms of the agreement – the Court found no breach of the implied covenants had occurred.

Finally, because there were no allegations that the government demanded that the contractor engage in any type of work that went beyond the scope required under the contract, there was no constructive change and no cardinal change because there was no alteration “so drastic that it effectively required the contractor to perform duties materially different from those originally bargained for.”

Comment:  This case brings home the point that construction projects are fraught with risks, many of which the contractor cannot control.  This contractor, a design-builder, was likely held to a higher standard than if the contract had been as lump sum agreement where the government obtained the permits as part of the design.  Here, the case does not give us any facts as to what efforts the contractor went through to discuss and obtain assurances from the state agency before the project was bid.  It seems inherently unfair that the government would get a price for an entire project cut-to-fill (low price), and then events occur over which the government and the contractor have no control, yet the contractor bears the entire risk of an unreasonable state agency.  Whether that fairness argument appeals to a judge or not, most judges will probably follow the terms of the contract.  The outcome in this case was predicable based on the clear contract terms.

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