Interview transcript:
Terry Gerton You’ve got an interesting case here. This is the first one you and I have talked about. That’s really DoD focused with the Armed Services Board of Contract Appeals and the Corpus Christi Ship Channel. Give us a quick overview of the case.
Zach Prince This case involved a contract with the Army Corps of Engineers for a dredging project at the Corpus Christi Ship Channel. So the Corpus Christi Ship Channel’s background: It’s something like 30-something miles from the Gulf of Mexico to the port of Corpus Cristi. It’s a vital part of one of the busiest ports in the country. And like any channel of this sort, it’s susceptible to erosion and all sorts of problems that would make it inaccessible to the deep water shipping requirements that they need for commerce to continue. So the Army Corps contracted with this company. I don’t want to mangle their name. I think it’s Pontchartrain, assuming I’m actually pronouncing all of the letters and it doesn’t have a French pronunciation, for a dredging project. They received the contract in 2019. The goal was raising the containment dike, constructing an interior berm around the placement area, shore protection, similar types of structural requirements on the shore to make sure that things don’t fall into the water and the channel can continue to be useful. Pontchartrain notified the Corps pretty early on that there was excessive erosion on at least one side of the placement area and that it was getting worse. They went through an iterative process of submitting a new proposal for some remedial work to address this. They went back and forth on the cost and the time that this would take. Ultimately, the government issued two bilateral modifications that purported to make Pontchartrain whole for the issues that they had identified. But while that had been going on, there was more erosion that they identified. The project ultimately was something like $4 million over and 240 days. And the Corps argued that they had no liability for any of this because there had been these bilateral modifications. And so that should be the end of the story for most of it. I don’t want to say any of it because they did say they’re liable for $400,000. But that did not exactly make the company whole.
Terry Gerton And the company came back and said that the project was commercially impractical because of the cost overruns, right?
Zach Prince They did, and it’s an interesting argument because I usually think of commercial impracticability as an argument you raise when you don’t want to perform anymore. When for whatever reason, the project is just so impossible to perform, not actually impossible, but it would bankrupt you. It would cost several times the initial plan. You couldn’t realistically achieve the objective. And you might raise it to say, we don’t have to go forward anymore. Here, this was really…it struck me as an alternative argument for why they’re entitled to some additional compensation. They had a slew of arguments that they raised with the board. The government moved for summary judgment. They really wanted to get rid of this whole thing on the basis of the release that had been part of one, but not both, of the modifications that they had executed earlier in the project.
Terry Gerton And so how did the court resolve that claim? Did they go back and look at data? Did they say, do the math? What was the answer?
Zach Prince They first went through the release part of this because that would have been dispositive. The government was, I think, hoping for an easy win with those. I see that argument all the time from the government: If you’ve got a contract language or some contract language that could be construed to prohibit recovery, that’s an easier argument, because you don’t have to get into the facts of whether the things they discovered actually were substantially worse than anticipated, that is when they’re performing this contract, or any of the messy fact details. Any construction project is going to have messy factual details. If they can get it kicked on a release, then great. But the board wasn’t biting. They said on the release language at least, only one of the two modifications had anything that could be considered a release. And it just didn’t extend as far as the government was suggesting. It couldn’t realistically cover unforeseen future damages, like new erosion, which is really part of this, even if it had arguably fairly broad language at the outset. It might be that the board looks at this with the full facts, develop the trial, and decides actually the government could win on that issue. But at least for now, they weren’t going to cut things off early.
Terry Gerton I’m speaking with procurement attorney, Zach Prince. He’s a partner at Haynes Boone. So Zach, in my non-legal reading of the summary of the case, it seems to me like there’s a couple of really important lessons here. One is about assessing and managing risk. If you’re a dredging contractor, you know that certain things are going to be outside of your control. How do you think about those as you’re entering into a contract?
Zach Prince It is very tricky, and anyone who’s in any part of the construction industry knows that when you’re developing your estimates on the front end for what will become firm fixed price, you need to do as much diligence as you possibly can. Construction contracts are almost always firm fixed price, so the contractor is going to bear the risk. If your estimates are wrong because you didn’t have enough data or there ultimately is a change circumstance that you didn’t consider, the latter scenario you might be covered, but the former, you’re probably not. So you need to go in with eyes wide open as to what kind of contingencies you likely need to build into your bid and whether you fully assess the potential risk. And then as performance commences and proceeds, you really need to be very cautious that any time there’s something that could be a change, whether that’s because the government ordered it from you or because just you’ve your observations of the real-world experience, that you’re segregating the costs and accounting for those costs in a way that you can demonstrate ultimately to either the government or, if you have to, a court or board, that it was caused by the change.
Terry Gerton So one, really good risk assessment, but two, how about these contingency clauses and what should you be looking for if you’re a contractor or from the government side to kind of cover these exigencies in the case of the contract?
Zach Prince So you’re likely just going to be stuck with the changes clause, and you’re going to have to think about the standard frameworks for government contracting of what could qualify as a constructive change or an actual order change and how to distinguish between a compensable change — that is, one where the contractor actually receives payment from the government — versus an excusable delay where you might get more time but you don’t get money. And it’s very nuanced, so it’s really pivotal that you can tie out the days of delay to an actual cause and the same thing with the additional costs. If you can only show that, well, it might have been one of 10 factors, you know, we had this massive overrun and it could have been a variety of things, you’re not going to recover for that unless every one of those factors is something that the government’s on the hook for. But you might get excused from liquidated damages, which is a pretty big deal. Those can be huge, I’ve seen $30,000, $40,000 a day, depending on the size of the project. But you’re not going to get what you’re really seeking, which is the relief from the extra cost that you incurred in the project. So good record keeping is probably the best advice I can give any contractor.
Terry Gerton And so what does this case mean for anyone who might be considering this claim of commercial impracticability?
Zach Prince I think it cautions that commercial impracticability is not likely to ever prevail unless it’s a really outlandish case. I mean, I know what the contractor was doing here. They were trying to present a very high figure. They’re trying to show that we had several hundred percent of the anticipated cost. But they were doing that through looking at the wrong cost comparison. They were saying, for the extra work, we thought it would have cost a lot less than it ultimately cost, and so it’s commercially impracticable. And the board said, no, that’s just the wrong way to do the math. And even if they had done the math right, that still wouldn’t really have shown commercial impracticability because the cases where that’s established are so few and far between.
Terry Gerton I love it when law and math intersect.
Zach Prince Unfortunately, it often demonstrates that lawyers are terrible at math.
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