March 28, 2019

By: Scott Walters, Partner, Smith, Currie & Hancock LLP

Experienced project delivery team members know too well the importance of timely and proper notice during a construction project. Ideally, contractual notice provisions, and any penalties for non-compliance, should apply equally to all of the contracting parties. For example, failure to comply with a notice provision concerning contract changes could bar a party from pursuing claims. And, untimely an improper notice can, likewise, prevent certain defenses to claims.

Nowhere is notice more scrutinized than in the federal government contracting arena. Recently, the United States Court of Federal Claims issued two separate decisions involving the same construction project and the same parties and dealing with two specific aspects of notice in the federal government contracting process. The court’s decisions on the notice issues may, at first, appear to contradict each other or to favor one party over the other. A closer look at these two decisions reveals that notice requirements, in the context of federal government construction contracts, can come in multiple forms and notice is not a “one size fits all” proposition.

The Project and the Claims
Nearly twenty years ago the United States Department of Energy, National Nuclear Security Administration (the “Department”) awarded a contract to the predecessor of CB&I Areva MOX Services, LLC (“MOX Services”) for design, construction, and operation of a Mixed Oxide Fuel Fabrication Facility at the Department’s Savannah River Site, near Aiken, South Carolina (the “Project”). The Project’s construction phase started in mid-2008 with payment made to MOX Services on a cost-reimbursable basis covering allowable incurred construction costs.

The Department’s payment obligation for the construction work also included various fee and profit as well as an incentive fee paid out quarterly. The Department tied the incentive fee portion of the construction work’s payments to completion of specified construction phases within defined schedule and cost parameters. Because of many uncertainties beyond the contractor’s control the Department took on added risk for cost escalations, and the contract contemplated that cost and schedule adjustments would be made during the Project pursuant to the Changes clause (FAR 52.243-2). Since Project construction started, estimated costs have escalated from less than $4 billion to almost $10 billion. And, the estimated completion date has been extended by 13 years.

Although construction costs more than doubled and the Project schedule dramatically increased, the Department did not issue a contract modification. MOX Services, however, submitted a request for equitable adjustment seeking to recover additional incentive fee due to increased costs for which the Department was responsible. Ultimately the Department denied this request, and also sought to claw back nearly $22 million in incentive fee it had already paid out to MOX Services.

In appealing the Department’s denial, MOX Services asserted several claims against the Department, including a breach of contract claim. In defense of this claim, the government argued that MOX Services had failed to provide the Department with contractually required notice and, therefore the claim should be dismissed. Specifically, the Department argued that MOX Services had failed to give notice of a request for equitable adjustment within thirty days of receiving a written change order.

The court rejected the Department’s argument on two grounds. First, the court reasoned that the cited notice provision did not apply because no change order was ever issued by the Department, and specifically found that where, as here, there is a constructive change to the contract, “notice of the claim need not be presented within the specific number of days allowed by the Changes clause.” Second, the court concluded that, even if a notice requirement applied to this situation, the breach of contract claim was not precluded, “because [the Department] knew of all operative facts giving rise to the claims.”

In a later case, MOX Services sought to overturn a separate decision by the Department to disallow certain subcontractor non-craft labor charges that MOX Services’ subcontractor had billed at increased hourly rates and that MOX Services had passed along to the Department. When the Department became aware of these increased rates, it gave MOX Services the opportunity to “explain and justify” the billing rate increases. Although MOX Services furnished the Department with documentation of the increases, the Department informed MOX Services that the information was insufficient to support the increased rates and required additional supporting information to determine whether the costs were allowable. The Department then began taking credits to MOX Services’ invoices seeking to recover the alleged overpayments it had already made for the non-craft labor charges.

MOX Services submitted a claim to the contracting officer seeking to recover these costs, which the contracting officer promptly denied. Once the claim was before the court, MOX Services sought summary judgment, which the court granted. In doing so, the court found that the Department had failed to comply with its own notice requirements for disallowing costs. Specifically, the court found that, although the Department had informed MOX Services that it intended to withhold costs pending further investigation, this was not the same of a notice of intent to disallow costs. The court likened the Department’s communication as an “informal discussion.” As such, the Court ordered the contracting officer to return to MOX Services all costs that the Department has previously withheld as a result of the increased labor rates.

Conclusion and Takeaways
At first glance, these decisions appear to place a much higher burden on the Department than on the contractor with respect to notice obligations. In the earlier action the court reasoned that the contractor’s failure to comply with strict timing requirements for notice of a contract change did not bar the claim, thus keeping the Department at risk. In the later decision, the court required the Department to pay back to MOX Services all alleged disallowed costs because the Department had failed to give strict notice.
The court’s rulings, however, involve two separate, unrelated, contractual notice provisions. The first provision addresses when the contractor must give the government notice of a request for equitable adjustment after the government has initiated a contract change. This notice requirement likely does not apply, or the government will not be prejudiced by the contractor’s failure to give such notice, where the government has not initiated a formal change, but where there is a constructive change to the contract. This is particularly true where the government has knowledge of the facts underlying the perceived constructive change.

The second provision relates to notice the government must give under a cost reimbursable contract if the government intends to disallow costs that previously were allowed and had been paid. Here, disallowance would result in a forfeiture by the contractor. Because the party seeking to avail itself of this remedy – the government – established the prerequisite notice, and because the government must clearly and unequivocally articulate its intent to disallow such costs, the government’s failure to do so could significantly penalize the contractor. Absent such clear intent, the contractor would be forced to speculate on the government’s motives at risk of being deprived of a significant right.

While these are government contracting cases, they contain lessons that are generally helpful in all projects. Prudent construction professionals, particularly those doing business with the government, should understand and comply with all notice provisions in their contract. Even if strict notice may not be required, it should be given early and often. Moreover, when notice is received, the prudent contractor must endeavor to understand what it means. If the meaning is unclear, the contractor should consider seeking legal advice in order to determine its rights and obligations and associated risks.

CB&I Areva MOX Servs. LLC v. United States, 138 Fed. Cl. 292, recons. granted (July 30, 2018);
CB&I Areva MOX Servs. LLC v. United States, 139 Fed. Cl. 725 (Nov. 9, 2018)
CB&I Areva MOX Servs. LLC v. United States, 141 Fed. Cl. 603 (Jan. 28, 2019)

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