You either talk to each other, or you talk to the lawyers.

The US Court of Federal Claims has decided an interesting case involving liquidated damages, delays and changes in a design-build contract.  See K-Con Building Systems, Inc., v. US, ____ Fed. Cl. ___, 2011 WL 3634164 (Fed. Cl. August 19, 2011).    As noted in my previous blog entry, the dispute all boils down to a lack of communications between the parties.  K-Con was the design-builder of prefabricated structures and outdoor smoking shelters for the Coast Guard.  The contract was awarded by the US General Services Administration and administered by the Coast Guard.  The Owner’s Program contained numerous performance requirements for the building, including the approximate square footage, the minimum clear height for the building’s shop bays as well as code compliant systems.   K-Con submitted a proposal that altered some of the requirements of the Owner’s Program, and the Coast Guard appeared to accept these alterations.

The Facts:  K-Con was required to submit drawings at 50%, 90% and 100% and was authorized to commence construction at the approval of the 50% drawings.  The Coast Guard initially asked if several of the performance requirements could be changed but eventually decided not to move forward with the requested changes.  During the design process, the Coast Guard made comments on K-Con’s proposed design.  However, K-Con never gave notice pursuant to the contract that either the proposed changes or the comments increased the time for performance of the work.  Further, although the parties negotiated several changes to the final cost, the contractual substantial completion date was never altered.   Although it is difficult to piece together the actual communications, it appears that there were little, if any.  The Coast Guard didn’t do a very good job of deciding what it really wanted, and K-Con didn’t do a very good job of managing expectations with respect to owner requested changes.  K-Con also didn’t understand the difference between “suggested” changes and “required” changes and treated all comments by the Coast Guard as requirements.

K-Con did not finish the work by the contractual substantial completion date, and the Coast Guard assessed liquidated damages.  The daily amount of the liquidated damages was $590, and the total assessment was $107,787.  You can do the math -- K-Con was extremely late.  K-Con disputed the assessment of liquidated damages on several fronts.  First, K-Con argued that the original calculation of the LD amount was not justified and constituted a penalty.  Second, K-Con argued that all of the Coast Guard’s comments were actually changes to the work, and K-Con should be entitled to an extension of the contract time.

Holding #1:  Quit whining about the substance of a contract you signed.  The court ruled that the time for determining the appropriate liquidated amount was at the beginning of the contract and would not entertain K-Con’s nit picking after the fact.  The government was entitled to include both overhead and administrative costs in its calculation.  The contracting officer doesn’t have to be perfect in his or her estimate of potential damages that the government will incur.  As long as the overall amount was reasonable, the court will not examine the details as to how it is calculated.

Holding #2:  Don’t play games with notice.  Although K-Con never provided specific notice under the contract that the Coast Guard’s comments on the proposed designs were “changes”, the court held that there was an issue of fact as to whether the Coast Guard had actual notice of the changes and whether the Coast Guard was prejudiced by any failure to provide notice.  If there was no prejudice, the design-builder would be entitled to an extension of time, despite the lack of notice.  The court noted the following standard for trial:

 “Thus, “[i]f the contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary fact-finding and decisionmaking, the Government is not prejudiced by the contractor's failure to submit a precise claim at the time a constructive change occurs.” Calfon Constr., Inc., 18 Cl.Ct. at 438–39. Conversely, “[w]here contractor silence would foreclose less costly alternative solutions or the ability of the Government to avoid contractor claims, timely notice is required.” Id. at 439.”

Holding #3:  Communicate, communicate, communicate.  The court then addressed whether the comments by the Coast Guard actually constituted actual changes by classifying the comments into two different types:  1) “recommendations” made by the Coast Guard to insure compliance by the design-builder to the original requirements of the contract; and 2) changes to the original contract requirements.  If the comment was merely a reminder to the design-builder of the contractual requirement and a suggestion that the design proposed would not meet those requirements, the court determined that the comment was not a change.  For example, a reminder that the contract required adequate ventilation for the telecommunications room and a suggestion that the design-builder’s design may not accomplish that goal was simply a “recommendation.”   However, if the comment mentioned requirements that were either additions to or contrary to the original program, the comment was a “change.”  For the comments in the second category, the court ordered a trial to determine whether the comment actually constituted a change.  Therefore, a comment that requested hose bibs be installed on two sides of the facility would be evaluated as to whether the hose bibs were necessary under good practice or a referenced code. 

The case is instructive as to the analysis of each comment and whether the court felt that a trial was necessary.  However, the better practice for K-Con would have been to tell the Coast Guard, “Sure, we are happy to include the hose bibs; however, that change will be a change and an increased cost to the contract.” 

What we learned today:  The lawyers are the only ones who win.  The real lesson from this case is not one of the enforceability of liquidated damages or notice of claims provisions.  As I said earlier, it all goes back to the parties’ lack of communication.  If the design-builder had established an open communications process with the owner and documented changes during the design process, and if the owner had clearly identified its objectives and requirements, then the dispute would not have occurred.  However, neither party did a particularly good job of working with the other to avoid later disputes.  Owners should feel free to discuss potential changes with design-builders; however, owners need to make final decisions within a reasonable time.  Design-builders need to provide owners with clear expectations with respect to potential changes and inform owners of the effects of changes as well as any claim that an owner’s actions will eventually result in a change.   Although the owner seems to have gotten a win out of this case, remember that the case is not over.  They still have to battle over what should have been discussed in the first place.  The only people who win when a case goes through this much litigation are the lawyers.