On January 30, 2023, Seyfarth’s Jason Smith will be speaking at a 3-day Associated General Contractors (AGC) panel discussion titled: “Navigating the Challenges of Complex Claims Involving Multiple Coverage Lines.” Using real claim examples, this session will focus on understanding and addressing the challenges associated with complex claims involving multiple lines of insurance. Experienced risk managers and counsel will impart practical advice about dealing with the competing requirements of different policies, as well as the potential conflict between liability and coverage theories and common exclusions. Ultimately, the session will talk about how to form and execute a sound strategy and manage the process and the people necessary to achieve a successful outcome. 

The AGC conference will be held at the Hyatt Regency Coconut Point in Bonita Springs, Florida. Those interested in attending may register for the conference at: https://na.eventscloud.com/ereg/index.php?eventid=700881&. Registration must be received before December 9, 2022.

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Both the General Services Administration (“GSA”) and the Department of Defense (“DOD”) are recognizing the impact of the eight percent rate of inflation on federal contractors. On September 9, 2022, DOD released a memo providing guidance to contracting officers “about the range of approaches available to them” to manage the effect of inflation on existing firm fixed price contracts. Similarly, GSA provided new direction to its contracting officers permitting easier access to the economic price adjustment clause in GSA contracts. 

Unfortunately for contractors, this does not mean an automatic, or necessarily an easy, path to recouping the costs lost to inflation. However, it does mean that the government is recognizing the concerns and considering avenues of relief on firm-fixed price contracts, perhaps providing some wiggle-room on the long-held position that contractors bear the risk of cost increases under firm fixed price contracts, even with the onset of extenuating circumstances.

DOD Caveats

The memo from DOD’s Principal Director, Defense Pricing and Contracting (DPC) states that where there are “extraordinary circumstances” effective immediately, DOD will consider adjustments to the contract price in order to “address acute impacts on small businesses and other suppliers.” Notably, while calling out small businesses, the Memo leaves the door open to other contractors and does not limit the application. DOD advised that it will contemplate these upward adjustments under Part 50.101 of the Federal Acquisition Regulation (FAR), which governs relief under Public Law 85-804. Traditionally, obtaining relief under Public Law 85-804 (a 1958 law allowing amendments to contracts to facilitate national defense) is an incredibly challenging path. The applicable sections of FAR Part 50 permit contracting officers to demand detailed supporting documentation in furtherance of any request for relief, including details on the impacts to contractor profits for approval or denial of the request, company financial statements, analysis as to how the adjustment was determined, interviews with personnel with personal knowledge, analysis of any mitigation steps taken by the contractor and any other “contemporaneous evidence” that supports the request. The recent DOD memo does not change those requirements, nor does it alleviate the likelihood of a DCAA audit. Contractors will need to be prepared to show what inflation rate was assumed at the time of bid, and any other underlying bid assumptions as to their pricing, as well as any documentation they have that substantiates the increase of the firm-fixed price contract. In short, the DOD’s Memo reminds contracting officers that avenues for relief do in fact exist for contractors, and that the traditional government position that contractors bear all of the risk for their firm fixed price contracts, need not necessarily be the case in the face of the current economic circumstances.

GSA Policy

On September 12, 2022, the leading procurement executives at GSA informed their contracting officers, that they no longer needed “additional approvals” to invoke the economic price adjustment clause (GSAR Clause 552.216-70) contained in the GSA contracts.    

In GSA contracts, a ceiling percentage for upward adjustments is usually set forth in the solicitation. However, in March of this year, GSA issued a memorandum establishing “temporary flexibility” and lowered the approval level to “one level above the contracting officer” and also relaxed the time limitations and constraints on the number of price adjustments that a contractor could request. Now, with the most recent memorandum, the authority to consider the equitable price adjustment rests directly with contracting officers, and there is an emphasis on the quick review and resolution of the requests.  

Yet, despite this optimistic news from GSA, unlike DOD contracts, the GSA changes are not applicable to firm fixed price contracts, unless the contractor can establish government-caused delay. GSA’s senior procurement official clarified: 

“In a fixed-price contract lacking an EPA clause, the contractor is obligated to perform at the fixed-price, and can only recover for increases to the fixed price that are the result of changes or other actions/inactions by the government. As a general rule, since inflation is not a government-directed change, it cannot form the basis for an equitable adjustment. However, if the inflated costs are the direct result of government action (for example, when government delays the work into a period when higher costs are encountered), compensation is appropriate.”

Practical Effects for Contractors

Contractors with GSA supply contracts need to verify the presence of the economic price adjustment clause in their respective contracts. The inclusion of this clause opens the door to the contracting officer’s ability to provide pricing relief beyond the ceiling percentage contained within the applicable solicitation. However, despite the temporary moratorium on time limitations, contractors should promptly make the requests for adjustment including detailed analyses explaining the necessity of the adjustment. 

Those contractors with firm-fixed price contracts for DOD should also promptly make any inflation or supply chain related requests for equitable adjustment, as DOD warned that such requests were “subject to available funding.” In making these requests contractors must outline the basis for the request, including the underlying bid assumptions, and provide a clear and detailed supporting package in order to minimize the back and forth with the contracting officer. The more thorough and supported the request, the more likely the contracting officer will approve and the quicker the contractor will experience relief. Contractors should meticulously prepare both the package for submission, and the relevant team members for interviews with DOD and DCAA.  

Conclusion

As inflation continues to rise, and the fear of recession looms, there is likely to be more relief from other federal agencies and/or updated guidance from DOD and GSA. In the interim, careful job cost records should be maintained to document the need for any future requests and contractor teams should regularly be tracking their bid assumptions against the current market costs to ensure they are not missing an opportunity to recoup lost costs.

construction claimsIn Lodge Construction, Inc. v. United States, the US Court of Federal Claims (“COFC”) prefaced its 46-page opinion by stating: “This case should serve as a cautionary tale to government contractors.”[1] Our ears perk up any time we read that kind of admonition in a published decision. The Lodge holding is, indeed, loaded with lessons on what to do, and what not to do, when presenting Contract Disputes Act (“CDA”) claims to the government. In particular, federal construction contractors and their performance bond sureties should take heed of the court’s holding in this highly-illustrative fraud case.

Background of the case

In 2010, the Army Corps of Engineers (“Government”) awarded Lodge Construction (“Lodge”) a fixed-price contract to rehabilitate a levee in Florida. To accommodate subsurface work, Lodge designed and constructed a temporary cofferdam based on a geotechnical site inspection and analysis furnished by the Government. The Government accepted Lodge’s final cofferdam design in July 2011. In March 2012, however, water breached two sections of the cofferdam’s sheet pile wall, after which the Government retroactively disapproved of Lodge’s cofferdam design. The Government requested that Lodge submit a new sheet pile design by May 29, 2012. Continue Reading Fraud and Forfeiture: Cautionary Tales of a Construction Claim Gone Wrong

surety liability FCA constructionThe federal Miller Act requires government construction contracts over $100,000 to be bonded. This process involves insurance companies, known as “sureties,” who issue payment or performance bonds to contractors, who in turn furnish the required bonds to the federal government. The bonds guarantee that the contractor will comply with the terms of the contract and perform as required. Although the sureties do not interact directly with the federal government, a recent decision from the US District Court in DC suggests that sureties could face liability where the bonded contractor violates the civil False Claims Act (“FCA”), 31 U.S.C. § 3729. In Scollick ex rel. United States v. Narula, No. 1:14-CV-01339-RCL, 2022 WL 3020936 (D.D.C. July 29, 2022) the court held, under the facts of that case, that the sureties had no knowledge of the fraud allegedly committed by the bonded contractor, and thus did not violate the FCA. Although the sureties escaped in this instance, this case demonstrates the expansive reach of the FCA and puts the insurance industry on notice that they are not immune from FCA liability. Continue Reading Surety Liability Under the False Claims Act

The Supreme Court on May 23, 2022, in its decision in Morgan v. Sundance, Inc., rejected the “arbitration specific waiver rule demanding a showing of prejudice” to the party opposing the petition to enforce the arbitration agreement. That rule had been followed for decades by nine Circuits.[1] Post Morgan, the analysis reverts to the standard contract waiver analysis “focus[ing] on the actions of the person who held the right; … [rather than] the effects of those actions on the opposing party.”[2] Although the case is an employment matter, the new rule applies whenever a party seeks to stay litigation and send the matter to arbitration under Sections 3 and 4 of the Federal Arbitration Act in essentially all commercial litigation contexts. Continue Reading Supreme Court Rejects Prejudice Element of Waiver Analysis When Enforcing Agreements to Arbitrate

Jason N. Smith and Edward V. Arnold authored a chapter in The Legal 500: Construction Country Comparative Guide, “United States: Construction.” The Chapter provides a comprehensive overview of legal issues in the US construction industry. You can read Seyfarth’s chapter of this year’s guide here.

Seyfarth Construction associate Michael Wagner spoke on the topic of fair legal solutions to material cost escalation in the April 19th episode of The Morning Huddle podcast “Contractual Solutions to Cost Escalation.”

Specialty contractors are feeling deeply exposed as they produce estimates today with prices that may be completely irrelevant tomorrow. Owners, of course, want price certainty in a totally uncertain market. Companies caught on the wrong side of this issue are risking devastating losses, and some companies are considering bowing out of the market right now rather than gamble on what seems like losing odds. The podcast discussed how contracts can protect everyone involved in a construction project. Listen to the full podcast here.

On May 3, Seyfarth attorneys Teddie Arnold and Anthony LaPlaca are presenting a 1-day session on Government Contract Compliance as part of the Federal Publications Seminars’ Training Academy in La Jolla, California. Seyfarth attorneys Joe Dyer, Stephanie Magnell, and Bret Marfut will also be presenting remotely.

A substantive compliance program can reduce the chances that someone in your company will engage in improper practices. And although a compliance program cannot absolutely insure against incurring criminal, civil, or administrative liability to the government, it can provide contractors an effective shield against the worst consequences of a federal fraud investigation. This course provides assistance to individuals and organizations in ensuring compliance with federal laws and regulations.

This panel will allow attendees to:

  • Gain insights and knowledge on the relevant statutory offenses and penalties, including the False Claims Act and False Statements statute
  • Develop an understanding of how to set up and audit your compliance programs
  • Develop an understanding of rules governing interactions between government and contractor personnel
  • Understand the compliance and meaning of numerous discrete topics, including defective pricing, time charging, contract claims, and the Buy American Act

Find more information and register on the Federal Publications Seminars website.

Seyfarth Construction partner Jim Newland spoke about construction project cost escalation and the remedies during and after negotiations have commenced in the March 31st Federal Publications Seminars Podcast “Cost Escalation in Construction Contracts.”

In construction, cost escalation is not an uncommon thing as the price of raw building materials fluctuate often.  More recently, prices have been increasingly volatile since the start of the pandemic due to swings in supply and demand as well as political posturing. Listen to the full podcast here.

CHALLENGE

The Port of Anchorage Intermodal Expansion Project was envisioned to be a $1 billion project that would replace outdated infrastructure at the Port of Alaska, but defective management, design, and construction derailed the Project. Seyfarth was tasked with prosecuting claims and recovering money spent by the Department of Transportation Maritime Administration (MARAD) for the defective design and construction work as well as the costs to remove and replace defective work. The task was complicated by the agreements between the Municipality of Anchorage and MARAD, which were memorialized in a 2003 Memorandum of Understanding (MOU) and a subsequent 2011 Memorandum of Agreement (MOA). While the MOU and MOA spelled out the respective duties of the parties, assigning, among other things, design and construction oversight and management to MARAD, the United States refused to acknowledge that these were binding contracts. Seyfarth attorneys were required to prove the existence of valid and binding contracts through motions practice, a 2-day mini-trial, and a 9-day bench trial. Seyfarth attorneys also had to develop a method for calculating the damages sustained by the Municipality of Anchorage for the defective work procured by MARAD, which was complicated by the number of individual task orders issued by MARAD for various components of the project.

The importance of this challenge cannot be overstated, as the Port of Alaska is a critical national seaport—90% of all goods for 85% of Alaska’s population crosses its docks as does fuel for the adjacent joint military base and the Ted Stevens International Airport. The Port also serves the nation as Alaska’s only Department of Defense-designated strategic seaport and deploys equipment and supplies internationally to and from five military installations in Alaska. It is one of only 23 strategic seaports nationwide.

SOLUTION

Seyfarth attorneys quickly developed a litigation strategy to establish the existence of binding and enforceable contracts between the Municipality of Anchorage and MARAD. Using contemporaneous records and admissions by MARAD and its contractors, Seyfarth attorneys proved to the court that both the MOU and MOA were valid contracts and binding on the United States. Seyfarth attorneys also proved that MARAD took responsibility for design and construction oversight and management under both the MOU and MOA and that MARAD was responsible for delivering to the Municipality of Anchorage a completed Port that was free of defects. Working with trusted experts, Seyfarth attorneys developed a method for quantifying the damages incurred by the Municipality of Anchorage using an impairment methodology that was ultimately adopted by the United States Court of Federal Claims.

RESULTS

After a lengthy trial and nearly eight years of litigation, Seyfarth attorneys secured a complete victory on behalf of the Municipality of Anchorage. The United States Court of Federal Claims entered a judgment on behalf of the Municipality of Anchorage and against the United States for more than $367.4 million, awarding every dollar sought by the Municipality of Anchorage at trial. The result is one of the largest monetary judgments ever entered against the United States.

The case is also likely to have major implications for how the United States manages its future infrastructure projects under the Infrastructure Investment and Jobs Act. The decision reinforces the fact that the United States can be held liable for the damages caused by its third-party designers and contractors. In the future, federal agencies will likely look to cooperative agreements and direct grants as means to limit the United States’ exposure for possible design and construction failures on major projects for state and local governments.

The case also reinforces the need for proper risk mitigation on major infrastructure projects through appropriate bonding and insurance requirements for design professionals and contractors. While nobody wants to anticipate a failed project, providing proper protection against the risk of failure is of paramount importance.

The Seyfarth team for this case included Jason Smith, Bennett Greenberg, Donald Featherstun, and Teddie Arnold.