On virtually every construction project, public or private, the contractor deals directly with a designated representative of the project owner. The owner’s rep provides information, answers questions and conveys directives. The representative seems to act with considerable authority and autonomy. That impression, however, can be misleading.
In a recent Minnesota case, a municipality’s project engineer signed a change order. The contractor acted in reliance on the change order. However, the city code stated that this preliminary change order was not final until it was approved and signed by the city engineer and the city manager. The project engineer signed the change order knowing it was unlikely his boss, the city engineer, would approve the increase in the contract price. The project engineer simply wanted to process the document and maintain a good relationship with the contractor.
When the project engineer’s superiors refused to approve the change order, the contractor was left without recourse. The project engineer followed the change order procedure. The contractor should have been familiar with the procedure and realized the project engineer lacked authority to finalize a change order.
Other cases this week involved a contractor’s insistence on a project owner investigation of an alleged differing site condition and a bid that misallocated costs among the contract line items. The contractor, having given notice of the site condition, could not refuse to continue work pending an investigation of the condition. And the bid, while mathematically unbalanced, was not shown to create an unacceptable risk for which the government would pay an unreasonable price for the work. The bid should not have been rejected.
In public contracting, a bidder must be deemed “responsible” to be eligible for contract award. Bidder responsibility relates to financial resources, managerial capability and past experience. Some of these considerations can be stated clearly and measured objectively. Some cannot. Performance on prior projects is one of the more problematic factors.
It is almost inevitable that some of the participants in a contractor’s past projects will have a chip on their shoulders. And it may not be based on actual performance deficiencies. Former employees are not always complimentary. Project owner personnel may resent having been on the losing end of a claim.
In a recent Ohio case, the public project owner’s evaluation team considered the “off-the-record” remarks of an individual who previously stated he had a vendetta against the company that submitted the low bid. The court refused to reverse a nonresponsibility determination, saying it was reluctant to substitute its judgment for that of the project owner.
Other cases this week involve a default termination for late completion and a bid mistake. The default termination was reversed because the delay was caused by a government design error. And, the bid mistake could not be corrected because it resulted from a subcontractor’s omission of work from a price quotation.
Construction contracts usually contain notice-of-claim provisions. The contractor must, within a stated period of time, notify the project owner in writing of any occurrence that may give rise to a claim for additional compensation under the contract. The policy behind these requirements is sound. Owners should have the opportunity to respond to problems as promptly as possible while options are available and costs can be mitigated.
Notice-of-claim provisions also have teeth. The contractor’s failure to give timely written notice of a claim occurrence will constitute a waiver of the right to any additional compensation under the contract. Courts take two approaches to this language. Sometimes, such as in a recent case from New York, failure to give proper formal notice is a bar to additional compensation even if the project owner had actual knowledge of the occurrence. The requirement is strictly enforced.
Other times, such as in a recent decision by the Wyoming Supreme Court, the requirement is interpreted in a more permissive manner. Some notice is sufficient and strict compliance is not mandated. A contractor was allowed to pursue a claim for extra work despite the failure to break down the cost elements of its claim.
The third case this week involved a project owner’s waiver of a contractual requirement for advance written change orders. A pattern of oral directives for extra work, and payment for some of that work, reasonably led the contractor to believe that the change order process would not be followed.
Construction contracts commonly cite that all work must be performed in accordance with acceptable industry standards. But, what are these standards and how are they determined? Does a recitation of this nature really add anything to a construction contract? Two recent cases addressed these issues head on.
In the first case, the contract included objective specifications for material testing. The material initially failed this test. The contractor later introduced expert testimony that reasonable construction standards would have allowed a modification of the test, resulting in acceptance of the material. A court ruled, however, that industry standards could not be used to alter unambiguous contract specifications.
The second case involved a very different contract. It lacked any specification whatsoever regarding a key aspect of the work. The court was forced to rely on expert testimony regarding construction industry standards when ruling that the contractor breached the contract and when determining the cost of replacing the defective work with work that met those standards.
The third case this week involved a payment bond surety’s allegation that a subcontractor was merely a financier of the work and was not eligible to recover against the bond. Although the sub contracted out all the work and financed the performance of that work, the sub was contractually obligated to the prime contractor to accomplish the work. The subcontract was not a sham despite the sub’s failure to perform any work at the site.
