How Strict are Deadlines for 'Constructive Changes?'

By John S. Mrowiec

Construction industry participants are well aware of the existence of contractual notice provisions. They usually set "deadlines" for notice of events constituting changes or claims and sometimes for quantification of the change or claim.

Much less well understood is how notice provisions actually are applied by the courts. Do the courts apply these provisions literally or are there exceptions to strict application of the "deadlines?"

A recent U.S. Federal Claims Court decision illustrated the issue, AAB Joint Venture v. United States, 2007 U.S. Claims LEXIS 22 (Feb. 2, 2007).

Project in Israel

AAB Joint Venture was the design-builder reporting to the U.S. Army Corps of Engineers for a storage and logistics complex to be constructed in Israel for use by the Israeli Defense Force. The design-builder subcontracted the earthwork operations and separately subcontracted the testing of earthwork densities.

Despite the design-build nature of the contract, the Corps provided particular specifications for earthwork. The Earthwork Division provided that backfill material was to be compacted to a specified maximum density, depending on location, according to modified American Association of State Highway and Transportation Officials requirements.

The design-builder's testing subcontractor informed the design-builder that it could not test 6-in. fill material using the specified standard. Accordingly, on Jan. 4, 2002, the design-builder submitted a Request for Information. The Army Corps responded, stating that the exact material and testing standards to be used were the design-builder's responsibility to determine.

Based on the response to the RFI, the design-builder instructed its earthwork subcontractor to use a 3-in. material compacted using the specified AASHTO standard. The earthwork subcontractor incurred additional costs.

On Dec. 17, 2003, after the project was complete, the design-builder submitted a certified claim to the contracting officer in the amount of $916,895 for the earthwork subcontractor's additional costs. Thereafter, the design-builder filed suit against the United States in the U.S. Court of Claims.

A 'Constructive Change'

The design-builder contended that the Army Corps' response to the request for information constituted a "constructive change," entitling the design-builder to an equitable adjustment. The federal construction contract provides for change orders or constructive changes. A "constructive change" is the following:

"(b) Any other written or oral order (which, as used in this paragraph (b), includes direction, instruction, interpretation or determination) from the Contracting Officer that causes a change shall be treated as a change order under this clause; provided that the Contractor gives the Contracting Officer written notice stating (1) the date, circumstances, and source of the order and (2) that the Contractor regards the order as a change order," 48 C.F.R. 52.243-4(b) (2005) (emphasis added).

Following discovery, the government and the design-builder each moved for summary judgment. Among other arguments, the government argued that the design-builder's claim should be barred because of the design-builder's failure to give the written notice required by the changes clause of the contract.
In addition to the notice required by subsection (b), the change clause further provides regarding notice:

"(d) If any change under this clause causes an increase or decrease in the Contractor's cost of, or the time required for, the performance of any part of the work under this contract, whether or not changed by any such order, the Contracting Officer shall make an equitable adjustment and modify the contract in writing. However, except for an adjustment based on defective specifications, no adjustment for any change under paragraph (b) of this clause shall be made for any costs incurred more than 20 days before the Contractor gives written notice as required. In the case of defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

"(e) The contractor must assert its right to an adjustment under the clause within 30 days after (1) receipt of a written change order under paragraph (a) of this clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by submitting to the Contracting Officer a written statement describing the general nature and amount of the proposal, unless this period is extended by the Government. The Statement of proposal for adjustment may be included in the notice under paragraph (b) above," 48 C.F.R. 52.243-4(d) and (e) (2005) (emphasis added).

The design-builder acknowledged that it had not given written notice to the contracting officer but argued that notice was not required under the circumstances because:

(1) The government had actual knowledge of the facts constituting the constructive change.

(2) The government was not prejudiced by the lack of formal notice (and the burden of showing prejudice lies with the government).

(3) The constructive change resulted from defective specifications.

Court Ruling

The AAB Joint Venture court conceded that federal construction contract "notice provisions should 'not be applied too technically and illiberally where the Government is quite aware of the operative facts,'" AAB Joint Venture, 2007 U.S. Claims LEXIS 22 at *28 quoting Hoel-Steffen Construction Co. v. United States, 456 F.2d 760, 768 (Ct. Cl. 1972).

The court also agreed with the principle that "the notice provision may not be strictly enforced if the contracting officer gives an oral directive knowing full well that it differs from the specifications," AAB Joint Venture, 2007 U.S. Claims LEXIS 22 at *29 citing Calfon Construction, Inc. v. United States, 18 Cl. Ct. 426, 438 (1989).

When a claimant alleges a constructive change "notice of the claim need not be presented 'within the specific number of days allowed' by the Changes clause," AAB Joint Venture, 2007 U.S. Claims LEXIS at *31 quoting Jo-Bar Mf'g Corp. v. United States, 535 F.2d 62, 66 (Ct. Cl. 1976). Nevertheless, "the filing of a claim within the time period of administration of the contract is clearly a prerequisite," Id.

Yet, "[I]n contracts, where lack of notice by the contractor forecloses less costly alternative solutions or avoidance of contractor claims by the government, then the notice requirement is likely to be enforced," AAB Joint Venture, 2007 U.S. Claims LEXIS 22 at *29 citing Calfon Construction, 18 Cl. Ct. at 439.

The Claims Court noted that in previous cases, the court had concluded that knowledge by the contracting officer that problems in contract performance is not the same as notice of a specific monetary claim against the government, AAB Joint Venture, 2007 U.S. Claims LEXIS at *30 (citing cases).

The AAB Joint Venture court pronounced that "the overriding principle to be followed is that '[w]ritten notice as to constructive changes must be supplied by the contractor for such time that the Government would suffer if not apprised of the facts,'" AAB Joint Venture, 2007 U.S. Claims LEXIS at *29 quoting Calfon Construction, 18 Cl. Ct. at 438.

Contracting Officer Not Informed

The Claims Court found no evidence that the contracting officer had any knowledge that the design-builder considered the response to the RFI to constitute a constructive change. Indeed, the court accepted that it was likely that the contracting officer thought the response actually relaxed the requirements of the specifications because after the response, the design-builder was free to use a different density standard test [but not a different percentage], AAB Joint Venture, 2007 U.S. Claims LEXIS at *29-30.

Likewise, there was no evidence that the design-builder stated orally or in writing to the contracting officer that it intended to seek monetary damages as a result of the alleged change. Nor did the design-builder submit a claim during the time the contract was being administered.

The AAB Joint Venture court could not say that the government was not prejudiced by the delayed filing of the claim or that the government could not have at least partially remedied the impact if it had received earlier notice.

Therefore, the Claims Court granted that portion of the government's motion for summary judgment for lack of notice of the constructive change arising from the RFI response, AAB Joint Venture, 2007 U.S. Claims LEXIS at *31.

The court denied the government's motion for summary judgment on the design-builder's separate "defective specifications" claim. The court distinguished a claim of constructive change arising from the "directive" (the response to the RFI) from a claim regarding the originally defective specifications themselves. The government might have been prejudiced by lack of notice from the constructive change but subclause (d) carved out claims of "defective specifications."

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.