May 2005

 

RECENT U.S. NAVY DECISIONS RE DELAY COSTS & LIQUIDATED DAMAGES

 

Two recent Court of Federal Claims decisions involving disputes with the U.S. Navy reaffirm and clarify the principles governing delay claims.  They also highlight a legal issue that is undecided under current law and needs resolution by the U.S. Court of Appeals for the Federal Circuit.  This article first summarizes the applicable legal principles and then reviews recent Court of Federal Claims cases pertinent thereto.

 

Contents:

 

1.  The Contractor’s Right To Compensation For Government-caused Delay

2.  Brief Review Of General Cost Recovery Principles

3.  Delay & Burden Of Proof -- Recent Navy Case:  Sollitt Constr. v. U.S. (February 23, 2005)

4.  Unresolved Issue -- Whether Liquidated Damages May Be Assessed Against The Contractor If The Government Is Able To Apportion The Causes Of Delay

 

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1.  The Contractor’s Right To Compensation For Government-caused Delay

 

          Project delays are disruptive and usually cause the direct costs on a project to increase. Any time a project experiences a ‘critical delay’ while substantial work is in progress, construction job site support costs (e.g., trailers, supervision costs, maintenance, utilities, tools, and equipment) will continue to accumulate unless it is practical to move these resources to another job site.  Usually it is not practical to reallocate these resources. Likewise, manufacturing resources idled by delay can result in continuing unanticipated costs.  For these purposes, a ‘critical project delay’ is one that extends the project completion or would extend completion if activities were not resequenced or accelerated to eliminate the effect of the delay.

 

          A contractor has a duty to mitigate delay impact if practical. In determining what mitigation is practical the courts consider: (1) whether the delay is of a reasonably known length to allow planning; (2) whether there are other projects, existing or new, that can use these resources effectively during the delay; (3) what the costs of reassigning the resources will be; (4) whether the delayed project can be partially or totally demobilized or manufacturing space sacrificed; (5) how the subcontractors and suppliers will be affected and how the delay’s impact on them can most effectively be managed; and (6) whether the remaining work can be resequenced to allow real progress to be made during the delay, and the cost of that resequencing.

 

When a critical project delay occurs, it almost always causes inefficiencies in the delayed work and impacts other work.  Even though it is often difficult to quantify these inefficiencies, they are nevertheless compensable.  Examples of these costs include but are not limited to: storage, escalation of direct material and labor prices, diluted management, out-of-sequence work, less efficient production and man-loading, and overtime labor rates. These increased costs caused by acceleration efforts are recoverable if the Government does grant a schedule extension.  The contractor may also recover extended or unabsorbed overhead costs in many cases, pursuant to the ‘Eichleay’ formula.

 

          In contrast to some private or public state construction contracts, the right to recover delay damages is not precluded in Federal contracts.  I.e., ‘no damages for delay’ clauses are not generally permitted.

 

2.      Brief Review Of General Cost Recovery Principles

 

          For contractors performing fixed-price contracts, the Federal Acquisition Regulations (FAR) cost principles guide the negotiation of equitable adjustments.  See FAR 31.102.  Generally, a contractor is entitled to an adjustment if the delay causes the contractor’s costs of performance to increase. Indirect costs must be grouped into pools that can then be allocated to each contract based on the benefits received as approximated by some allocation base (often labor hours).

 

          The fundamental objective of an equitable adjustment for government-caused delays is to restore the contractor to the same position that it would have been in if there had been no delay.  FAR 52.243-4; FAR 52.242-14.  The contractor is entitled to profit on the extra costs but not for any lost-opportunity profit. The price adjustment equals the difference between what it would have cost to perform the work as originally required and what it reasonably cost to perform the work as changed.  The contractor’s costs must be ‘reasonable,’ although costs will not be rejected simply the work could have been done more cheaply.  However, the contractor has the burden of showing ‘reasonableness’ when challenged by the Government.  FAR 31.201-3(a).

 

 

3.  Delay & Burden Of Proof -- Recent Navy Case:  George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229 (February 23, 2005)

 

George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229 (February 23, 2005):  In this construction contract dispute, plaintiff contractor filed suit under a U.S. Navy Contract against the United States alleging numerous claims, including compensable delay, excusable delay, labor cost escalation, overtime premium pay, reimbursement for unilateral deductions, balance due on proposed change requests, and Prompt Payment Act interest.  The U.S. Department of the Navy awarded the contractor a contract for the renovation of two existing buildings, an addition to a building to house a "ship's trainer," and new construction of a pump house and two "range buildings," all at the Naval Training Center, Great Lakes, Illinois. The contract work was to be conducted in three phases. The contractor alleged that three circumstances chargeable to the Navy delayed the completion of phase I construction. The court found that there were concurrent critical path delays chargeable to both the Navy and the contractor which could not be apportioned, and that therefore the Government's assessment of liquidated damages for phase I was not valid. Next, the contractor alleged seven circumstances chargeable to the Navy that delayed the completion of phases II and III. The court found that it could not apportion the critical path delay in these phases either, and did not award compensable delay costs to the contractor.  The court awarded the contractor $551,056 plus interest for return of liquidated damages and some miscellaneous contract entitlements, but it was not awarded compensable delay costs.

There is an important distinction between ‘compensable’ delay and ‘excusable’ delay.  Compensable delay: if the Navy is responsible for delaying the contractor’s critical performance path, then the contractor recovers its delay costs.  Excusable delay: if the Navy or some event that is neither party’s fault (e.g., severe weather) delays the critical path, then the contractor is entitled to a schedule extension but no monetary recovery.  It is of course relieved from liquidated damages late penalties.  If in an ‘excusable’ delay situation the Navy does not grant a schedule extension, then there is deemed to be an acceleration of the work and the contractor is entitled to its acceleration costs.

The Sollitt court provides an excellent state-of-the-law outline regarding the law of delay in Federal contracts, and it is set forth hereinbelow.  The three general headings are:  1. Compensable Delay; 2. Excusable Delay; 3. Proof of Equitable Adjustment Claims.

1. Compensable Delay

a. Government liability for an equitable adjustment may lie when the Government has caused delay to the contractor's performance.

b. Government liability is limited to its unreasonable delays.

c. Government action or inaction must be the sole proximate cause of the delay

For the Government to be found to have caused compensable delay, it must have been the sole proximate cause of the contractor's additional loss and the contractor would not have been delayed for any other reason during that period

d. The burden of proof for compensable delay is borne by the contractor

In some cases, this burden may be met if the contractor proves four elements: the Government's delay was of unreasonable length, the Government was the proximate cause of the contractor's delayed performance, the contractor was injured, and there was no concurrent delay on the part of the contractor.

e. The contractor bears the burden of separating and apportioning concurrent delays

Even if the Government was not the sole proximate cause of the delay, the contractor may recover if it can establish ‘clear apportionment’ of the delay attributable to each party.

f. The contractor must prove the extent of the Government-caused delay, and its increased costs, to prove its injury

E.g., additional costs related to the expense of performing certain contract work in winter (or summer if heat is a major factor), or the rise in materials and labor prices in the later work period.

g. The increased costs of winter construction may be compensable

h. The increased costs of winter work may be apportioned for concurrent delays

Apportionment of additional costs encountered by working in the winter months, when there have been concurrent delays caused by the Government and the contractor, is appropriate, and may be achieved by awarding a proportion of winter-related costs based on a mathematical formula derived from the amount of delay attributable to each party.

i. When establishing the extent of Government-caused delay to project completion, the contractor bears the burden of proving critical path delays

The reason that the determination of the critical path is crucial to the calculation of delay damages is that only construction work on the critical path had an impact upon the time in which the project was completed. One established way to document delay is through the use of Critical Path Method (CPM) schedules and an analysis of the effects, if any, of Government-caused events upon the critical path of the project.

A Government delay which affects only those activities not on the critical path does not delay the completion of the project.

j. Because the critical path changes over time, critical path schedule updates are needed to analyze delays

The critical path of construction activities may change as a project is actually built, and activities that were not on the original critical path subsequently may be added.  Accurate, informed assessments of the effect of delays upon critical path activities are possible only if up-to-date CPM schedules are faithfully maintained throughout the course of construction.

k. The contractor bears the burden of apportioning concurrent critical path delays

If the evidence shows that the contractor, along with the Government, caused concurrent delay to the critical path of a project, the contractor must apportion the delays affecting the completion of the project to be able to recover delay damages. Courts will deny recovery where the delays are concurrent and the contractor has not established its delay apart from that attributable to the Government.

l. The contractor must prove the amount of home office and field office overhead that is related to the Government-caused delay of project completion

Extended home office overhead costs are a type of delay damages that may sometimes be recovered. Where the Government suspends performance of a contract, the contractor's indirect costs, such as home office overhead, often accrue beyond the amount originally allocated to that particular contract. These additional indirect costs may thus be unabsorbed. The Court of Claims consistently allowed a contractor to recover not only additional direct costs that accrue to a contract where completion of performance is delayed by the Government, but also any unabsorbed, indirect costs that result.

 m. When the parties stipulate to the daily costs of home office and field office overhead, the contractor must prove the extent of the Government-caused delay but is relieved of some other elements of proof of its increased costs.

When the daily costs of field office and home office overhead have been stipulated, the award of extended overhead costs may be derived from the sum of the proven Government-caused unreasonable delays which slowed the completion of the project.

n. When multiple delays by one party are concurrent with each other, that party's delays must be analyzed to ensure that the overall effect of these multiple delays is correctly attributed to that party

One final complication with concurrent delays is the inquiry into whether one party's multiple delays are concurrent with each other in addition to being concurrent with the other party's delays. The court focuses only on critical path activities that are delayed.  Among all critical path delays, the court first examines the proven delays caused by only one party to make sure that the delay days which are concurrent with each other are not counted more than once.

2. Excusable Delay

The Government has the initial burden of showing late completion, and the contractor then has the burden to show that the delay was excusable

In the context of litigating liquidated damages assessed by the Government in a construction contract, the Government first must meet its initial burden of showing that ‘the contract performance requirements were not substantially completed by the contract completion date and that the period for which the assessment was made was proper.’ Once the Government has met that burden, the burden then shifts to the contractor to show that any delays were excusable and that it should be relieved of all or part of the assessment. Where a contractor is prevented from executing his contract according to its terms, he is relieved from paying liquidated damages.

3. Proof of Equitable Adjustment Claims

a. The contractor must prove that its actual incurred costs for the changed work were reasonable

Once the contractor has proved the Government's liability for the costs of added or changed contract work, the actual costs incurred by the contractor will provide the measure of the equitable adjustment to the contract price, if those incurred costs are reasonable. Although a contractor's incurred costs were once considered to have a presumption of reasonableness when determining the amount of an equitable adjustment  this presumption has been eroded by an amendment to FAR 31.201-3. This regulation now states that no presumption of reasonableness per se shall be attached to the incurrence of costs by a contractor, and sets forth guidelines.

b. The Government bears the burden of proving the cost of deleted contract work

However, when the Government has deleted work and/or costs from a fixed-price construction contract, the Government, not the contractor, bears the burden of proving the amount of any downward equitable adjustment to the contract price.

 

 

4.  Unresolved Issue:  Whether Liquidated Damages May Be Assessed Against The Contractor If The Government Is Able To Apportion The Causes Of Delay

 

There is an unresolved legal question which needs to be resolved by the Federal Circuit – does government-caused delay to the critical path void the contract's liquidated damages provision, even if the contractor shares some of the blame?  The traditional answer has been yes since 1914. More recently, some courts and Boards of Contracts Appeals have allowed partial assessment of liquidated damages where the Government has been able to precisely apportion responsibility for delay.  

 

The Sollitt case, above, discusses this issue and makes reference to another recent Navy Court of Federal Claims case, R.P. Wallace, Inc. v. United States, 63 Fed. Cl. 402 (December 15, 2004).   Plaintiff contractor, a construction firm, contracted with defendant United States acting through the Department of the Navy for renovation and repair work to a New Orleans, Louisiana naval facility.  Because the contract was not completed on time, the Navy assessed liquidated damages.  The contractor filed suit for remission of those liquidated damages, as well as compensable damages, due to government-caused delay and disruption.  The court reduced the number of late penalty days from 250 to 229 by apportioning responsibility for the delay between the Navy and the contractor.  The Wallace court comes out strongly in favor of allowing liquidated damages even though the Navy was partially at fault.

However, another Federal Claims case two years earlier, PCL Constr. Servs., Inc. v. United States, 53 Fed. Cl. 479, 487, states that this issue is still unsettled in the Federal Circuit:

‘The status of the rule against apportionment in the United States Court of Appeals for the Federal Circuit is unsettled. … .  Regardless of the apparent discrepancy between the rule against apportionment, as described in Acme Process Equipment; and the clear apportionment rule, described in Sauer, the two rules have coexisted in the United States Court of Claims, the United States Claims Court, and the United States Court of Federal Claims, as well as the United States Court of Appeals for the Federal Circuit, for many years.’

 

The Sollitt court observed the existence of this conflict and ‘punted’:

‘In light of the extensive discussions in PCL and R.P. Wallace of the rule against apportionment and the conflicting rule allowing apportionment of liquidated damages, and in the absence of a precedential decision resolving the apparent conflict between these two analyses of controlling precedent on this issue, the court here will examine the facts of this case under both the rule that forbids apportionment and the rule that permits apportionment of liquidated damages. Because the result in this case happens to be the same under either rule, the court here does not need to further address the status of the rule against apportionment of liquidated damages in this circuit.’