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Federal Claims Court Approves Contractor’s Use of Blue Book Rates to Calculate of Standby Equipment Costs in Constructive Change Claims Against the Navy
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Construction Co, Inc. v. United States
2008 U.S. Claims LEXIS 137 (May 21, 2008)
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| The United States Court of Federal Claims discussed the measurement of equitable adjustment for standby equipment costs in a case involving the United States Department of the Navy.
Metric Construction Co. entered into two contracts with the Navy to perform construction work on the small island of San Nicolas off the coast of California. Under the first contract, Metric agreed to make improvements and repairs to the Navy’s airfield runway on the island. The second contract called for repairs to certain of the islands roadways and storm drainage systems. Certain conditions on the island created logistical challenges for Metric in performing the work. These included limited landing areas for barges carrying equipment, bad weather, and the existence of a salt water spray over the site.
In the course of performing its Work, Metric encountered certain difficulties that impacted its work either by delaying it or adding costs not accounted for in the contract sum. Metric sued the Navy to recover the costs associated with these delays and added contract amount, asserting that the Navy’s actions changed the contract beyond what was expected. The Court found that Metric could recover from the Navy on three of its claims, each of which constituted a constructive change to Metric’s contracts.
Specifically, Metric was entitled to recover for (1) changes made to the barge landing system by the Navy which often made it impossible for Metric to land its barge and unload its equipment; (2) work performed at the Navy’s direction which contradicted the description of the work in the contract specifications, and which created extra work for Metric after it had already started performing according to the contract specifications; and (3) cleanup by Metric required by the Navy of contaminated soil much of which came from the work of other contractors or leaks and spills on the roads and runways not caused by Metric. The Court found that these constituted constructive changes to Metric’s contracts which entitled it to an equitable adjustment for the added costs and delays, but only to the extent specifically caused by such changes.
The most significant element of the equitable adjustment due Metric related to standby equipment costs The issue before the Court, then, was the appropriate method for calculating the standby rates to be applied to Metric’s equipment rendered inactive for periods of time due to the Navy’s constructive changes. Because Metric owned most of the equipment it used on the projects, direct leasing costs were not available. Therefore, Metric and its experts used rates from the Dataquest Blue Book to substantiate its costs. The Navy, however, argued that the Blue Book was not appropriate for calculating Metric’s costs.
The Court noted that a statute was incorporated into the parties’ contracts which called for a hierarchy means of deriving ownership and operating costs for construction equipment, starting with actual-cost data and moving towards “predetermined” schedules or rates. First, the Court found that using actual cost data was not possible because Metric had not broken its equipment costs down into identifiable costs for each piece of equipment. Thus, the Court turned to whether the Navy had agreed to use a particular schedule of construction use rates, such as the Blue Book. Although there was no written agreement specifying use of the Blue Book to determine equipment costs, the Court determined that the Navy’s use of Blue Book values in prior claims on the same projects was probative of the parties’ understanding of contractual terms, and ultimately held that the evidence supported the existence of such an agreement to use the Blue Book rates for owned equipment.
Furthermore, the Court discussed the standby rates to be used for Metric’s older equipment. Although the Navy attempted to use calculations based on a manual that was not agreed upon by the parties, the Court found that this was not appropriate, and noted that fully depreciated equipment was still entitled to reasonable ownership costs due to costs of repairing and maintaining the equipment. Further, the Court noted that the Blue Book rates used by Metric for its older equipment sufficiently took into account its age and the depreciation due to its age.
Finally, the parties disputed whether it was appropriate to make an adjustment for the Blue Book rates for the location of the work. Specifically, Metric argued that a severity factor was appropriate because the equipment was being used on an island affected by wind-blown corrosive salt spray. The Navy contended that the regional adjustment factor taken into account in the Blue Book rates already accounted for these conditions. The Court determined that the regional adjustment factor incorporated into the Blue Book rates were inappropriate here, however, as they assumed factors based on Southern California, which would have actually reduced, rather than increased, the rates. Because of the island’s remote location frequented by winds and surf, the islands small size, and the fact that the work took place on the periphery of the island, Metric’s equipment was constantly exposed to a corrosive environment. Accordingly, the Court applied a severity factor (of 10%) to the Blue Book standby rates.
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New York Appellate Court Holds That No Damages for Delay Clause Does Not Bar Recovery of Early Completion Bonus
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Trocon Construction Corp. v. City of New York
2008 N.Y. App. Div. LEXIS 4316 (May 20, 2008)
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| The Appellate Division of the Supreme Court of New York held that an early completion bonus in a construction contract was not barred by a “no damages for delay” clause as it was a bid item of the contract.
The case arose out of a contract between a contractor and the City of New York for the reconstruction of part of Sixth Avenue in Manhattan. The contractor agreed to perform soil borings to locate and determine the size of underground voids believed to be contributing to sidewalk and pavement subsidence and to appropriately remedy the voids. Because the City of New York contemplated that the work on the project would interfere with vehicular and pedestrian traffic, the contract provided for various payment incentives for early completion, including an early completion bonus if work on both sides of the avenue was completed within 30 days. Delays arose principally due to a dispute over the boring operations when unexpected boulders were encountered. The contractor contended that it was not required by the contract specifications to perform borings through boulders, which should be completed using a different boring operation; the City maintained that such borings were included and should be performed using the same operation as provided for in the contract. The dispute was resolved by the Contract Dispute Resolution Board, which found that the contractor was entitled to compensation for the extra work performed. The Board claimed lack of jurisdiction to resolve the contractor’s claim for the incentive bonus for early completion of the work on the west side of the avenue.
The contractor commenced this suit for payment it allegedly would have received but for the City’s interference with the boring operation. On summary judgment, the trial court held that the contractor had been fully compensated for the breach as the contractor was awarded damages for the extra work that it performed. On appeal, the Appellate Court concluded that the contractor had not been fully compensated for the breach by the City as the contractor expected to earn a significant incentive bonus for completing the west side work within 30 days. The Appellate Court rejected the City’s argument that the bonus was barred by a “no damages for delay” provision, and concluded that loss of an incentive bonus is not “damages for delay” within the meaning of such a provision. The Court also held that even if such a “no damages for delay” clause were applicable, there were factual issues in the record suggesting that an exception to the clause could apply as damages for uncontemplated delays, irrespective of cause, are recoverable under New York law. The Appellate Court then concluded that there were issues of material fact as to whether the contractor could have completed the west side work within 30 days. Specifically, the Court found that the contractor had offered evidence projecting that the work would have been completed in 23 days based upon the rate of completion actually achieved on the west side work, minus the days of delay caused by the City.
The Appellate Court thus overturned the summary dismissal of the trial court finding that the the incentive bonus was not barred by the “no damages for delay” clause.
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United States Court Of Federal Claims Recognizes General Contractor’s Claim For Cumulative Impact Resulting From Many Modifications And Rejects Defense That Modifications Constituted Accord And Satisfaction
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Bell BCI Company v. United States
81 Fed. Cl. 617; 2008 U.S. Claims LEXIS 116, (April 21, 2008)
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Note: This case was affirmed in part, vacated in part, and remanded in Bell BCI Co. v. United States, 570 F.3d 1337 (Fed. Cir. 2009), to be discussed in a a future issue of Constructlaw.
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Plaintiff, Bell BCI Company (Bell), a general contractor, sued the Government for $6,200,672 in damages plus interest under the Contract Disputes Act for unpaid balance of the price, unresolved changes, delay damages, labor inefficiency costs and profit thereon. Bell also asserted claims on behalf of five subcontractors.
Bell contracted with U.S. to construct a laboratory building for the National Institute of Health (the “Agency”). After 9 months of construction, the agency added a new floor, issued over 200 modifications that delayed completion by 19 ½ months and increased the price by 34 percent or $21.4 million. Although Bell was paid for performing most of the changed work, Bell asserted an impact claim for the cumulative effect of the changes on Bell’s overall performance and asserted pass-through impact claims on behalf of Subcontractors 1 through 5. The U.S. denied liability based on the defense of accord and satisfaction and claimed that Bell was liable for $447,678 in liquidated damages for failing to complete the project on time.
The Court found the Government’s accord and satisfaction defense was without merit because none of the contract modifications included any payment to Bell for cumulative impact or labor inefficiency. The U.S. needed to establish the following requirements for an accord and satisfaction: 1) proper subject matter; 2) competent parties; 3) a meeting of the minds; and 4) consideration. The Court held a hearing to determine whether the U.S. satisfied these standards and found that it did not. Further, the Court found Bell did not expressly release its cumulative impact claim in any modification. The Government. relied on a particular Modification, No. 93, to support its position, however, the release language did not address cumulative impact claims and Modification No. 93 preceded many of the events giving rise to the claim.
The Court accordingly awarded Bell over $6 million plus interest under the Contract Disputes Act.
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US District Court in California Holds Basic Builder’s Risk Coverage Inapplicable to Increased Cost Of Completing Portion Of Project Which Was Not Built At Time Of Failure – Rather Coverage of Such Losses Was Restricted to More Limited Additional Coverage Part
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Oceanside Pier View, L.P. v. Travelers Property Casualty Co. of American
2008 U.S. Dist. LEXIS 37755 (S.D. Cal. May 6, 2008)
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| The U.S. District Court for the Southern District of California considered whether the basic coverage of a $28 million Builders Risk policy applied to the increased cost to complete construction of the unbuilt portion of a mixed use project attributable to delays which resulted from the failure of a shoring wall during construction. The court held that the basic Builders Risk coverage did not apply, and that coverage for increased costs of completing structures which were not under construction at the time of failure was subject to the $100,000 limit of “additional coverage” provided for "Expediting Costs and Additional Cost of Construction Materials and Labor".
Oceanside Pier View, L.P. (Developer) owned and developed certain property, in Oceanside, California (the Property). In or around February of 2005, Developer began discussions with Travelers Property Casualty Co. of America (Insurer) regarding insurance for the Project. After a brief period of negotiation, during which Developer provided Insurer with the Project construction budget, Developer agreed to purchase an insurance policy from Insurer (the Policy). The Policy provided basic coverage for "Builders' Risk," "Soft Costs," "Business Income," and "Rental Value," and additional coverage for "Expediting Costs and Additional Cost of Construction Materials and Labor," among other things.
During construction, a shoring wall failed and caused damage to the Project. As a result of the shoring wall failure, "progress on the construction was interrupted, the critical path of construction was impacted, and the completion date for the Project was delayed." Developer suffered losses as a result of the shoring wall failure, including “costs to redesign and repair the failed shoring wall, increases to the GMP pursuant to change order requests for Contractor, increased costs to protect the Property from further damage, increased costs of financing, increased fees and general conditions for the general contractor and project manager, and other soft costs and loss of business income." Developer also determined that the shoring failure "caused a delay to the Substantial Completion date of 79 days."
Developer promptly informed Insurer of its claim for losses relating to the shoring wall failure, and upon receipt of the claim, Insurer started an investigation. Plaintiff eventually submitted a claim seeking approximately $1.3 million in damages. Throughout 2006, Insurer met and corresponded with Developer regarding its claim. On June 5, 2006, Insurer sent a letter to Developer which provided in part, "[it is] our position that the cause of loss falls within the insuring agreement of the policy and coverage is afforded subject to all applicable terms, conditions and deductible(s)." Insurer subsequently issued several advances to Developer as partial payment on the insurance claim.
On March 22, 2007, Insurer notified Developer that portions of Developer's insurance claim would not be covered. Among other things, Insurer informed Developer that Developer's losses from increased labor and materials costs were not entirely covered under the Policy, and were subject to a $ 100,000.00 limitation. On June 28, 2007, Developer commenced an action against Insurer, seeking declaratory relief providing that Developer is entitled to coverage for "loss of income resulting from increased labor, materials, overhead, and general condition expenses due to delays caused by the Shoring Failure."
Insurer sought summary judgment on Developer's claim for the increased costs of construction materials and labor to complete portions of the Project which had not been built at the time of the failure. Insurer contended that the plain language of the Policy provided that Defendant was not obligated to pay more than $ 100,000.00 for the increased costs to construction materials and labor pursuant to the "Expediting Costs and Additional Cost of Construction Materials and Labor" provisions of the Policy. Insurer also contended that the "Builders' Risk" and "Business Income" provisions did not provide coverage for the increased costs of construction materials and labor, particularly when those provisions were read in light of the entire policy.
The "Builders' Risk" provisions of the Policy provided that Insurer "will pay for 'loss' to Covered Property from any of the Covered Causes of Loss." The Policy defines "Covered Property" as "Builders' Risk," and "Builders' Risk" as,
“Property described in the Declarations under "Builders' Risk" owned by you or for which you are legally liable consisting of:
a. Buildings or structures including temporary structures while being constructed, erected or fabricated at the "job site";
b. Property that will become a permanent part of the buildings or structures at the "job site":
(1) While in transit to the "job site" or temporary storage locations;
(2) While at the "job site" or at a temporary storage location.”
Reading the Policy as a whole, the Court concluded that the "Builders' Risk" provisions of the Policy provided coverage for losses resulting from the direct physical loss of buildings or structures being erected on the Property, but did not include coverage for the increased costs of construction materials and labor to construct never-before constructed portions of the Project. The Court further held that the plain language of the "Builders' Risk" provisions protect only those buildings, structures, or portions of buildings and structures under construction at the Project, and do not protect against the unforseen costs to construct never-before constructed buildings or structures which may arise as a result of delays. Accordingly, while the "Builders' Risk" provisions covered--and Insurer paid Developer for--the cost to replace the failed shoring wall in this case, including any increased costs to construction materials and labor which were necessary to reconstruct or replace the shoring wall to its original condition, the "Builders' Risk" provisions did not cover the increased costs of construction materials and labor which Developer incurred to complete portions of the Project which were not yet under construction at the time that the shoring wall failure caused the delay.
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North Carolina Appellate Court Holds Limitation Of Damages And Indirect Damages Provisions In Engineering Contract To Be Enforceable
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Mostellar Mansion, LLC v. Mactec Engineering & Consulting of Georgia, Inc.
2008 N.C. App. LEXIS 1011 (May 20, 2008)
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| Mostellar Mansion, LLC (Mansion) entered into a contract with Mactec Engineering and Consulting of Georgia, Inc. (Mactec) in connection with Mostellar’s plan to purchase a tract of land for the construction of an apartment complex (the Project Site). Under the contract, Mactec was to assess the subsurface conditions of the Project Site, determine if the Project Site was suitable for the proposed construction and provide recommendations for foundation design and site preparation for the proposed structures. The contract contained the following pertinent provisions:
“8. Limitation of Liability. The inclusion of a limitation of liability provisions in this Agreement under the terms set forth below is a material consideration for [Mactec’s] willingness to perform the services. To the maximum extent permitted by applicable law and for additional consideration of $10.00 from [Mactec], [Mostellar] hereby expressly agrees that the liability of [Mactec} … for any cause of action based upon breach of contract, strict liability, negligent professional acts, errors or omissions or negligent misrepresentation arising out of or in connection with this Agreement and/or any services provided, or work product developed, pursuant to this Agreement shall be limited to the aggregate sum … of $50,000 or the total fees paid to [Mactec] by [Mostellar] under this Agreement, whichever is greater….
9. Indirect Damages. Neither party shall be responsible to the other or to any third party for any economic, consequential or indirect damages (including, but not limited to, loss of use, income, profits, financing or reputation) arising out of or relating to this Agreement or the performance of the services. “
Pursuant to the contract, Mactec drilled test borings at the Project Site and submitted a geotechnical report explaining its findings. Mostellar paid Mactec $8,900.00 for its services. Thereafter, Mostellar filed a complaint against Mactec alleging breach of contract, negligence, professional negligence and negligent misrepresentation. Mostellar alleged that upon commencing the grading of the Project Site, it discovered that the soil was unsuitable for the planned construction. In response to interrogatories, Mostellar alleged that Mactec caused over $300,000 in damages. Mostellar asserted damages associated with the removing and replacing of the unsuitable soil as well as damages associated with loss of business and costs of insurance, interest and penalties.
Mactec moved for summary judgment asserting that all of Mostellar’s claims arose out of the contract and were therefore subject to the contract’s terms and conditions. Mactec sought an order enforcing the Limitation of Liability and Indirect Damages provisions. The trial court granted Mactec’s motion. On appeal, in addition to arguments regarding the applicability of Georgia or North Carolina law, Mostellar argued that that the Limitation of Liability and Indirect Damages violated applicable law.
The Court determined that Georgia law governed Mostellar’s breach of contract claim. The Court held that there was no conflict between the Limitation of Liability provision and the public policy of Georgia. Turning to the Indirect Damages provision, Mostellar argued that the provision conflicts with Georgia statute Ga. Code Ann. § 13-8-2(b) which bars agreements in connection with construction projects which hold a party harmless from liability associated with property damage or bodily injury resulting from its sole negligence. The Court held that the Indirect Damage provision at issue did not release Mactec from liability resulting from personal injury, death or property damage and thus was did not violate Ga. Code Ann. § 13-8-2(b). Mostellar also argued that Georgia law regulates engineers and thus a provision exculpating an engineer from liability was void against public policy. The Court held that the provision was not void against public policy. The Indirect Damages provision did not relieve Mactec from all liability and, importantly, did not relive Mactec from liability associated with personal injury, death or property damage.
The Court, applying North Carolina law, next addressed whether the Limitation of Liability and Indirect Damages provisions applied to the Mostellar’s professional negligence and negligent misrepresentation claims. Mostellar argued that the Limitation of Liability provisions and Indirect Damages were void against North Carolina law. The Court disagreed finding that the parties were sophisticated professionals, and the result of their bargain did not elicit a profound sense of injustice. Moreover, the health and safety of the public were not implicated by the limitation of liability. Accordingly, the Court found that Limitation of Liability and Indirect Damages provisions also applied to the Mostellar’s professional negligence and negligent misrepresentation claims.
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US District Court in New York Holds That CPM Expert Not Required to Prove Delay and That Liquidating Agreement is Required in Order to Bring Pass-Through Claims
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Helena Assocs., LLC v. EFCO Corp.
U.S. Dist. LEXIS 39977 (S.D.N.Y. May 14, 2008)
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| Owner, The Helena Associates, LLC contracted with EFCO Corporation for the work, materials and installation of aluminum windows in the construction of The Helena, a high-rise residential building in New York City. Helena brought a breach of contract action against EFCO alleging that EFCO had failed to comply with project schedules, caused delay to the project, and failed to provide sufficient manpower and supervision. Helena claimed damages in excess of $6.7 million. EFCO denied Helena’s claims arguing that the delays were caused by factors outside of its control and within the control of parties for whom Helena was responsible, and asserted a counterclaim for additional work of approximately $875 thousand. EFCO moved for partial summary judgment.
EFCO sought summary judgment on Helena’s delay claim arguing that Helena had not proved entitlement to delay damages because Helena did not provide a critical path method analysis (“CPM”), but rather relied solely upon the testimony of the project manager regarding delays. In assessing this contention, the Court held that under New York law, Helena was required to show that EFCO was responsible for the delay, that EFCO’s delay caused a delay in project completion without concurrent delay, and that as a result Helena suffered damages that could be rationally estimated. While a CPM analysis is sometimes used for this purpose, the Court held that use of a CPM analysis is not required to meet this burden and there was no support for EFCO’s assertion that testimony regarding delay and a project’s critical path must be presented by an expert rather than a lay witness. The Court did however require that the testimony of Helena’s fact witnesses, who had not been designated as experts, be limited to their first-hand knowledge and experience rather than custom or practice in the industry.
EFCO’s main argument was that Helena had not presented sufficient evidence to demonstrate that EFCO caused the delay and that there had been no concurrent delay by Helena or a party within Helena’s control. The Court disagreed, finding that Helena had offered evidence on these topics which created genuine issues of material fact preventing entry of summary judgment.
EFCO next challenged certain line items of Helena’s claim for damages incurred by KBF, Helena’s construction manager, and Rose Associates, Helena’s representative on the project. EFCO contended that as Helena had not paid these claims by KBF and Rose Associates, under New York law, the only mechanism by which Helena could recover for these amounts was through a liquidating agreement. In evaluating this argument, the Court reviewed the three elements of a liquidating agreement: (1) the imposition of liability upon a party for a third party’s increased costs, providing the first party with a basis for legal action against the party at fault, (2) a liquidation of liability in amount of the first party’s recovery against the party at fault, and (3) a provision for the pass-through of that recovery to the third party. In order for such an agreement to be valid, it must be an actual contractual commitment. Helena countered that it did have such a liquidating agreement, pointing to a clause in its agreement with EFCO entitling Helena to recover damages caused to KBF and Rose Associates. The Court found however that because the clause in the contract between Helena and EFCO addressed only the accountability of EFCO, and did not include any agreement between Helena and KBF or Rose Associates, that it did not satisfy the requirements of a liquidating agreement. Accordingly, the Court held that Helena could not assert damages on behalf of KBF and Rose Associates and granted summary judgment on those portions of Helena’s claim.
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US District Court in Michigan Holds No Damages for Delay Provision in Subcontract to be Performed in Georgia Unenforceable Under Ohio Statute Where Choice of Law Provision Specified Application of Ohio Law
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Acme Contracting, Ltd. v. TolTest, Inc
2008 U.S. Dist. LEXIS 36355 (E.D. Mich. May 5, 2008)
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| The United States District Court for the Eastern District of Michigan recently had to interpret an Ohio statute (O.R.C. §4113.62) which statute dealt with the enforceability of no damages for delay provisions in construction contracts. Relying on prior cases interpreting the applicable statute, the District Court found that the subcontract which limited delay claims to a time extension only was prohibited under the statute and, therefore, void and unenforceable. Although the District Court permitted the subcontractor to recover delay damages, it also concluded that the subcontractor had not proven that it was entitled to extended home office overhead costs using the Eichleay formula and refused to award such damages.
Acme Contracting, Ltd. (Acme) served as a subcontractor to a contractor, TolTest, Inc. (TolTest), on a construction project in Atlanta, Georgia (the Project) pursuant to a series of subcontract agreements. TolTest performed remediation and abatement work while Acme provided demolition services. According to a work schedule prepared by TolTest, Acme’s ability to complete its demolition work was contingent on TolTest completing its abatement work. Throughout the various phases of the Project, TolTest caused multiple delays to Acme’s work. The delays resulted in Acme completing its work 72 days later than expected.
As a result of TolTest’s refusal to (1) pay sums sought by Acme under its last three properly submitted payment applications, (2) pay additional amounts due and owing to Acme under a time and materials (“T&M”) arrangement, and (3) reimburse Acme for its delay damages, Acme sued TolTest under theories of account stated, breach of contract, and quantum meruit. After a bench trial, the District Court issued findings of fact and conclusions of law and rendered judgment.
First, the District Court determined that TolTest was liable to Acme on the account stated claim because TolTest never disputed the amounts sought by Acme under the three unpaid payment applications. The District Court concluded that TolTest’s refusal to pay where the appropriate lien releases were provided by Acme and where TolTest received payment in full from the general contractor was improper. Judgment in the total amount of the unpaid payment applications was rendered in Acme’s favor.
Second, the District Court held that TolTest was liable to Acme on the quantum meruit claim because TolTest directed Acme to perform additional work on a T&M basis. Additionally, TolTest received daily reports detailing the additional work and TolTest clearly benefited from the additional work performed. Judgment in the amount of the additional work was entered in Acme’s favor.
Third, the District Court held that TolTest was liable to Acme for delay damages. As an initial matter, the District Court indicated that Ohio law applied by virtue of a choice of law provision in the subcontracts. Examining an Ohio statute, the District Court explained that Ohio prohibits provisions in construction subcontracts which purport to waive or preclude liability for delay damages where the delay was caused by the owner’s or contractor’s actions or inaction. The District Court concluded that the contracts at issue contained such limiting provisions which rendered the bar against delay damages void. Specifically, the contracts at issue provided that a time extension was the “sole and exclusive remedy” to Acme for delay. The contracts further provided that any claim for delay costs was limited to a situation where the delay was more than four months in length. Relying on a recent Ohio Appellate Division holding, the District Court held that the contract provisions limiting Acme’s entitlement to delay damages were void and unenforceable because the evidence proved that the delay was in fact caused by the contractor, TolTest.
Having determined that Acme was entitled to seek delay damages, the District Court next considered the nature of the delay damages to which Acme was entitled. Although the District Court awarded damages for the delay caused by TolTest during the two phases of the Project, the District Court denied a portion of Acme’s claim which sought unabsorbed home office expenses. Acme had calculated its unabsorbed home office expenses using the Eichleay formula. The District Court explained that such a claim under the Eichleay formula required a two step inquiry: first, was Acme on “standby” and required to be able to immediately resume the work at any time during the delay period? Second, was Acme able to secure and perform additional work while on standby? Given the fact that Acme could and did perform additional work on a T&M basis during various delay periods, the District Court concluded that Acme was not entirely in standby mode and was able to perform other work during those periods. Accordingly, Acme’s claim for overhead damages was denied.
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