A recent and curiously-timed decision from the Civilian Board of Contract Appeals ("CBCA") demonstrates the significant challenges a contractor faces when trying to recover increased costs incurred as a result of an epidemic. This article summarizes the decision and outlines the ways a contractor may distinguish this decision from the current COVID-19 epidemic as part of its efforts to seek compensation for the project impacts of the virus.
Pernix Serka Joint Venture, CBCA No. 5683 (Apr. 22, 2020) involved a firm, fixed-price contract awarded in September 2013 for the construction of a rainwater capture and storage system in Freetown, Sierra Leone. The Department of State ("DOS") issued a notice to proceed to Pernix Serka Joint Venture ("PSJV") on December 17, 2013, setting a contract completion date of November 17, 2014. However, an outbreak of the Ebola virus began in the neighboring Republican of Guinea in March 2014, and by July had spread to Freetown, Sierra Leone.
PSJV sought direction from DOS for how to proceed in response to the epidemic on several occasions. DOS declined to provide direction to PSJV, instead informing the contractor that it was responsible for determining how to proceed. One such missive, dated August 6, 2014, stated in part "we can't tell you to leave the Post but the decision for your people to stay or leave for life safety reasons rests solely on your shoulders. Yours peoples [sic] safety should be of the most utmost [sic] concern! Please let me know what action you decide to take in reference to this situation."
Two days later, the World Health Organization ("WHO") declared the Ebola outbreak an "international public health emergency." Faced with airlines cancelling flights and contractor and subcontractor personnel requesting to leave Sierra Leone, PSJV decided on August 8, 2014 to shut down the project and evacuate its personnel. DOS acknowledged PSJV's notice that it was suspending performance, and stated "Since you are taking this action unilaterally based on circumstances beyond the control of either contracting party, we perceive no basis upon which you could properly claim an equitable adjustment from the Government with respect to additional costs you may incur in connection with your decision to curtail work on this project."
PSJV and DOS personnel remained in contact in the months following PSJV's suspension of performance. DOS continually declined to provide guidance on when PSJV should return to the project or what measures the contractor should take to protect its employees from the Ebola virus. PSJV ultimately remobilized to the site in March 2015, with new medical, health and safety procedures in place to protect its employees.
In July and August of 2015, PSJV submitted two requests for equitable adjustment ("REAs") seeking time and cost impacts for additional work and effort undertaken by the contractor in response to the Ebola virus outbreak, as well as extra costs for additional life safety and health measures adopted to ensure the safety of the contractor's employees. The Contracting Officer granted the 195-calendar-day time extension requested by PSJV, but denied the monetary portions of the REAs. The contractor subsequently submitted a monetary claim for approximately $1.25 million, which was also denied. The contractor then appealed the denied claim to the CBCA.
On appeal, the DOS filed a motion for summary judgment asserting that under the firm-fixed price contract, PSJV bore the risk of any unexpected costs not attributable to the Government. The Board granted the Government's motion, finding that, as a matter of law, the contract's Excusable Delay and Default clauses "explicitly address how acts of God, epidemics, and quarantine restrictions are to be treated. A contractor is entitled to additional time but not additional costs."
The Board further found the contractor's efforts to shift the risk for the increased costs to the Government to be unavailing. PSJV asserted that DOS's expectation for the contractor to work in "Ebola crisis conditions without any guidance or direction from [DOS], or a suspension of work," and the need for additional life safety and health measures, constituted either a cardinal change or a constructive change. The Board rejected these theories, noting that the Government "never changed the description of work it expected from the contractor…[and] repeatedly stated that it would not give directions to the contractor on how it should respond to the ongoing outbreak, instead leaving the decisions solely in the hands of the contractor." Because the fundamental nature of the work to be performed by the contractor was not altered, the Board found there was no cardinal change to the contract. Likewise, because the Government did not provide direction to the contractor on how to respond to the outbreak, there was no constructive change. Finally, the Board declined to consider the contractor's assertion of a constructive suspension of work because it was raised for the first time in the opposition brief, did not arise from the same set of operative facts as the legal theories raised in the certified claim, and therefore was not a timely claim for the proceeding before the Board.
The Board's decision in PSJV highlights the challenges that contractors will face in seeking to obtain increased costs resulting from the COVID-19 epidemic. However, there are various issues that may distinguish our current situation from the PSJV case.
Unlike the DOS in PSJV, which was careful to avoid providing any direction to the contractor, owners in the era of COVID-19 are generally being more proactive. In certain cases, both public and private owners have barred contractors from work sites or suspended performance. On other contracts, public and private owners have directed contractors to modify work schedules, adjust work patterns for social distancing, or to reduce the number of personnel present at project sites.
These and other contractual directions relating to COVID-19 may entitle a contractor to recover all or portions of its increased costs under a variety of contractual theories. For example:
Additionally, Congress has granted federal agencies additional authority to compensate contractors for certain COVID-19 related costs that are not typically recoverable under traditional contract clauses. Specifically, Section 3610 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act empowers – but does not require – federal agencies to use funds appropriated for that agency to modify the terms and conditions of a contract and compensate contractors for certain costs related to keeping their employees and subcontractors in a ready state when those employees or subcontractors are unable to perform work on a federally-approved site and cannot telework. Contractors barred from work sites, and whose employees cannot telework, should carefully review the Section 3610 guidance issued by their contracting agency to determine if they are eligible to submit a request for equitable adjustment for such costs.
The fact that Congress has allowed for such flexibility in the federal context will create greater pressure on private owners to be similarly adaptable. While the DOS in PSJV is unlikely to encounter any blowback as a result of its harsh stance addressing the Ebola outbreak in Africa, the same is not true for owners in the age of COVID-19, which has more directly touched the lives of the entire United States. The risk of reputational harm to an owner should provide contractors some leverage in seeking monetary relief.
For additional information on the impact of COVID-19 on contractors, including what steps contractors should take to preserve potential claim for cost or schedule impacts arising from the pandemic, see the Smith Pachter McWhorter COVID-19 Q&A: A Handbook for Government Contractors During the Coronavirus Pandemic and the COVID-19 Response Resource Center.
Smith Pachter McWhorter is monitoring COVID-19 pandemic developments and will continue to bring you updates and analysis to help navigate the crisis through our COVID-19 Response Resource Center. For additional guidance regarding your company’s response please contact the authors identified below or any member of our team.