Changes clause explained

A changes clause, in government contracting, is a required clause in United States government construction contracts.

Background

Cardinal Changes (Significant Changes) clauses are the source of a significant number of disputes arising from government contracts. The clause, which has appeared in nearly every U.S. government contract for over 100 years, gives the government the power unilaterally to order contractual modifications.^[1] If the parties are unable to agree on compensation to be received by the contractor for the modified work, the contractor shall be entitled to an equitable adjustment. 'The goal of an equitable adjustment is to place the contractor in the position they would have been in had the change not been encountered'. The adjustment should not alter the contractor's profit or loss position from what it was before the change occurred.^[2]

The Changes clause was first used in defense contracts where it was taken to be essential in time of war for the government to include new technologies without halting work to renegotiate the contract. Changes clauses are in almost all categories of government contracts.^[3] If the Changes Clause is not incorporated in writing it is incorporated implicitly under the Christian Doctrine in almost^[4] all U.S. government contracts, including FAR Part 12 contracts.

Changes clauses for construction contracts in the Federal Acquisition Regulations

There are three Changes clauses for construction contracts contained in the Federal Acquisition Regulations. One applies to fixed-price contracts, another to cost reimbursement contracts, and the third to time and materials or labor hours.^[5]

All three of these clauses give the government the right, at any time and without notice to the sureties, to make changes in the work within the general scope of the contract. The clause for fixed-price contracts specifies that changes may be made to the specifications (including drawings and designs), the method or manner of performance, government-furnished facilities, equipment, materials, services, or site, or acceleration of the work. The clause for cost reimbursement contracts specifies that changes may be made to the "plans and specifications or instructions incorporated in the contract."

Purposes

The Changes clause accommodate several purposes. Either party may want to incorporate a technological advance. The Changes clause allows the contractor to propose changes to the work. This can result in more efficient contract performance. The Changes clause permits the government to ask for something new without the overhead of conducting a new procurement.

The limitation of the government's right to make changes to those changes deemed to be "within the general scope of the contract" was for many years of great procedural significance in government contract litigation because, prior to the Contract Disputes Act of 1978, a claim arising from such a change could not be brought to the various boards of contract appeals.^[6] This was because claims involving changes outside the general scope of the contract, sometimes called cardinal changes, were deemed to be breach of contract cases and had to be taken to the Court of Claims. The distinction between cardinal and other changes is no longer jurisdictionally significant because the Contract Disputes Act gives boards of contract appeals concurrent jurisdiction with the U.S. Court of Federal Claims (formerly named the U.S. Claims Court^[7]) over breach of contract cases.^[8] Whether a change is a cardinal change may, however, still be relevant to whether the contractor can unilaterally stop work pending resolution of a dispute,^[9] and the measure of damages that may be recovered.

As a quid pro quo for the government's unilateral right to order changes, the Changes clause gives the contractor a right to compensation.^[10] If the parties are able to agree on the amount of the cost adjustment, they can execute a contract modification. If they are unable to agree, the contractor is entitled to an equitable adjustment in accordance with the cost principles contained in Part 31 of the FAR.^[11]

Cost reimbursement vs. fixed cost contracts

The nature of the Changes clause for cost reimbursement contracts is somewhat different from that for fixed-price contracts because in the case of a cost reimbursement contract the contractor is already entitled to reimbursement for all of its reasonable costs and only needs an adjustment in the target price or the amount of its fee. The clause provides for such an adjustment to be made in the estimated cost, delivery or completion schedule, and the amount of any fixed fee.^[12]

There are a number of basic rules regarding the Changes clause that have been developed by the courts and boards of contract appeals over the years. One of the fundamental tenets is that a contractor cannot claim an equitable adjustment where it incurs additional costs or performance delays voluntarily, rather than as a result of government action.^[13] Another tenet is that a contractor cannot prevail on its claim for equitable adjustment unless it shows that its interpretation of the contract is reasonable.^[14] Moreover, the government is responsible only for changes ordered, approved, or adopted by the contracting officer or an authorized representative of the contracting officer.

Causation

To recover for a change, the contractor must show that the change caused the increased costs or delays for which it is seeking compensation.^[15] A contractor ordinarily will not be entitled to recover for a constructive change in the work required by the government where the government's actions were not the direct cause of the contractor's increased costs. An example of such a situation is where government-furnished property is not at the work site on schedule, but does not cause any delay to the contractor because, for other reasons, the contractor was not ready to proceed with the installation of that property. Where, however, a contractor and the government are both responsible, through their unreasonable acts, for failure to discover a differing site condition, the costs of the delay have been ordered shared.^[16]

Notes and References

1. 4-15 Construction Law P 15.03
2. J.F. Shea Co. v. United States, 10 Cl. Ct. 620 (1986). Where a contract was bid in a lump sum, the equitable adjustment for substitution of work is computed by the following formula: (1) Adjusted contract price; (2) Less projected cost without changed conditions; (3) Plus actual cost under changed conditions; (4) Plus reasonable profit/overhead computed in accordance with governing regulations on difference between 2 and 3.
3. Vom Baur, The Origin of the Changes Clause in Naval Procurement, 8 Pub. Cont. L.J. 175 (1976).
4. See 4 No. 2 Nash & Cibinic Rep. ¶ 13 ("In Aero Corp., ASBCA 8178, 1963 BCA ¶3665, the board refused to use the doctrine to insert the Changes clause in a purchase order. In Jamsar, Inc., GSBCA 4396, 76-2 BCA ¶12053, the board refused to insert the Changes clause in a building services contract. Under the FAR, the Changes clause is a mandatory clause for almost all types of contracts.")
5. 48 C.F.R. § 52.243-1 (Fixed Price), 52.243-2 (Cost Reimbursement), 52.243-3 (Time and Materials).
6. 41 U.S.C. § 601 et seq.
7. Pursuant to the Court of Federal Claims Technical and Procedural Improvements Act of 1992, the name of the United States Claims Court was changed to the United States Court of Federal Claims. Pub. L. No. 102-572, § 902, 106 Stat. 4516 (effective Oct. 29, 1992).
8. 41 U.S.C. §§ 607(d), 609(a)(1).
9. Edward R. Marden Corp. v. United States, 442 F.2d 364, 194 Ct. Cl. 799 (1971) ; Gregory Lumber Co. v. United States, 9 Cl. Ct. 503, 518 (1986) ; Gevyn Constr. Corp. v. United States, 11 Cl. Ct. 203, aff'd, 827 F.2d 752 (Fed. Cir. 1986).
10. 48 C.F.R. § 52.243-4(d).
11. See C.B.C. Enters., Inc. v. United States, 24 Cl. Ct. 187 (1991), aff'd, 978 F.2d 669 (Fed. Cir. 1992) (contractor cannot use the Eichleay formula when the government orders additional work and extends the performance period; home office overhead costs are covered by the mark-up on the direct cost of the extra work); Appeal of A.A. Beiro Constr. Co., ENG BCA No. 5103, 91-3 B.C.A. (CCH) P 24,149 (1991) (subcontractor entitled to adjustment for extended home office overhead under Eichleay because it incurred delays caused by government-requested changes). See also Satellite Elec. Co. v. Dalton, 105 F.3d 1418 (Fed. Cir. 1997) (evidence of a contractor's ability to take on other work during government-caused delay barred Eichleay damages). Note that the government was not required to prove that the contractor actually took on work during the suspension period, or to prove by a preponderance of the evidence his ability to do so. Cf. Appeal of Interstate Gen. Govt. Contractors v. West, 12 F.3d 1053, 1058 (Fed. Cir. 1993) (timely completion precludes recovery of unabsorbed overhead even where the government caused a suspension of performance, because the anticipated time of performance was not actually extended by the suspension). Aircraft Gear Corp. v. Kaman Aero Corp., 875 F. Supp. 485, 496 (N.D. Ill. 1995) (damages must be unavoidable if the Eichleay formula is to employed).

    In the case Togo D. West Jr. v. All State Boiler, Inc., 146 F.3d 1368 (Fed. Cir. 1998), the U.S. Court of Appeals for the Federal Circuit clarified the test for resolving unabsorbed overhead claims. All State distinguished Satellite, above, which many practitioners believed had ended Eichleay's vitality. Under All State, to avoid Eichleay, the government must show not only that a contractor sought additional work during a suspension and that the additional work was not part of the contractor's planned/normal stream of work, but was intended to replace the government-delayed project. In shifting the burden of proof, All State may have effectively overruled Satellite. See also Am. Renovation and Constr. Co., Inc. v. United States, 45 Fed. Cl. 44 (1999) (for a contractor to recover unabsorbed overhead, it must demonstrate that the government put the contractor on standby, required it to resume work at a moment's notice, and consequently precluded the contractor from taking on other work).

12. 48 C.F.R. § 52.243-2(b)
13. See, e.g., Appeal of R-E, Inc., ASBCA No. 20891, 77-2 B.C.A. (CCH) P 12,670 (1977). In R-E, Inc., the contractor was to build a foundation for a utility pole installation in accordance with plans and specifications furnished by the government and had no obligation to pass upon the adequacy of such a foundation to accomplish the purpose in view. The contractor, nonetheless, insisted on installation of a more expensive foundation, allegedly on the basis that the government's foundation was not adequate. Held, that this was a design specification and not a performance specification; and that by prescribing the character and dimensions of the foundation, the government implicitly warranted that if the design was followed, the foundation would be adequate. Thus, the use of a steel-reinforced foundation, exceeding both the government's specifications and trade practice, did not entitle the contractor to additional compensation for the extra cost thus incurred.

    See also Calfon Constr., Inc. v. United States, 18 Cl. Ct. 426 (1989), aff'd, 923 F.2d 872 (Fed. Cir. 1990) (listing elements to establish a constructive change); Appeal of Essential Constr. Co., ASBCA No. 18706, 89-2 B.C.A. (CCH) P 21,632 (1989) (the board rejected contractor's claim because there was no support for the proposition that the government caused the delays); Appeal of Berkeley Constr. Co., PSBCA No. 1153, 85-3 B.C.A. (CCH) P 18,254 (1985); Appeal of Accent General, ASBCA No. 29796, 86-3 B.C.A. (CCH) P 19,237 (1986).

14. M.A. Mortenson Co. v. United States, 843 F.2d 1360 (Fed. Cir. 1988) ; P.J. Maffei Bldg. Wrecking Corp. v. United States, 732 F.2d 913 (Fed. Cir. 1984) ; Appeal of Moulder Bros., ASBCA Nos. 33389, 33714, 89-2 B.C.A. (CCH) P 21,639 (1989); Appeal of Santa Fe Eng'rs, Inc., ASBCA No. 32448, 89-3 B.C.A. (CCH) P 22,024 (1989). See also T.L. James & Co., Inc. v. Traylor Bros., 2000 U.S. Dist. LEXIS 4378 (E.D. La. Mar. 23, 2000) (noting that the contractor must show that it reasonably relied upon its interpretation of the contract and that it incurred damage as a result of the material difference between the expected and actual conditions); Johnny F. Smith Truck and Dragline Serv. v. United States, 49 Fed. Cl. 443 (2001) (if there is a conflict between the contractor's view of the government's obligations and the actual language of the contract provisions, this should trigger the contractor's duty to inquire; the contractor cannot protest the term unless the contractor inquired or sought clarification of the contract's language).
15. See Massman Constr. Co. v. Tenn. Valley Auth., 769 F.2d 1114 (6th Cir. 1985) ; Wunderlich Contracting Co. v. United States, 351 F.2d 956 (Ct. Cl. 1965) ; Appeal of Batteast Constr. Co., Inc., ASBCA No. 35818, 92-1 B.C.A. (CCH) P 24,697 (1991) (based on on-site observations by project superintendent, the board ruled that the contractor was entitled to an adjustment for lost labor productivity attributable to government directed change); Appeal of Frontier Constr. Co., ASBCA No. 33658, 89-2 B.C.A. (CCH) P 21,595 (1989) (the board held that where the delay is the result of government fault, as with defective specifications, all of the delay is per se unreasonable).
16. T. Brown Constructors, Inc. v. Federico Pena, 132 F.3d 724 (Fed. Cir. 1997)