Thursday, February 25, 2016

Government Uses Wrong "Standard" to Measure Damages

In 2013, the Department of Transportation awarded a contract to reconstruct 10 miles of highway and install utility conduits for six of those mile in a National Park. The contract included the "Differing Site Conditions" clause (see FAR 52.236-2).

When the contractor began work on the utility trench, it encountered what it considered to be a differing site condition. While attempting to excavate the utility trench, it encountered numerous large boulders which significantly slowed down work on the project. According to the contractor, the unusual size and concentration of the obstructions were unanticipated at the time of the bid. The Government did not agree that the unexpected boulders constituted a differing site condition.

Ultimately, contractor filed an equitable adjustment proposal for an additional $81 thousand for what it considered to be extra work associated with the unanticipated boulders. The contracting officer denied the claim on the basis that the unexpected boulders did not constitute a differing site condition. The contractor appealed the final decision to the Civilian Board of Contract Appeals (CBCA).

During discovery, it was learned that the contractor's actual cost was less than its anticipated cost for the utility trench work. Upon learning this, the Government moved to dismiss the appeal, arguing that even if a differing site condition was encountered, the contractor is not entitled to recover because it failed to demonstrate that it experienced an increase in costs due to "alleged" differing site conditions. The Government asserted that the contractor must show that it experienced an increase in cost due to the physical conditions of the site and that the contractors actual costs were less than either its bid amount or its anticipated cost for the work.

The contractor countered that the appropriate way to measure damages is the additional costs incurred due to the differing site condition, not whether the project was still profitable despite encountering the condition. The contractor maintained that it is entitled to recover the additional costs directly attributable to the differing site condition regardless of whether those costs increaced the originally estimated cost of the project. Moreover, the contractor argued that its ability to perform for less than its bid price for the project and obtain a profit is not a basis to deny it the right to claim compensation for damages associated with the differing site condition.

The CBCA agreed with the contractor. It stated that the appropriate measure of damages for a differing site condition is the additional cost incurred by the contractor as a result of the differing site condition. More specifically, the equitable adjustment for a differing site condition is the difference between what it cost it to do the work and what it would have cost if the unforeseen conditions had not been encountered. The CBCA specifically ruled that the Government was using the wrong standard to measure damages.

You can read the full text of the CBCA decision here.

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