A recent case in the United States Court of Federal Claims illustrates how a contractor may be able to recover under the ‘cumulative impact theory’ for the impact of multiple changes. Barry Bramble discusses the background and implications of this case on the contracting industry.

In Bell BCI Company v. United States, 2008 U.S. Claims LEXIS 116 (Fed. Cl. Apr. 21, 2008), the contractor, Bell, entered into a $63.3 million contract with the National Institutes of Health (NIH) for the construction of a new five-story laboratory building with a full basement on the NIH campus in Bethesda, Maryland.
The contract required completion within 821 calendar days after notice to proceed, which was issued on April 1, 1998, making June 29, 2000, the required completion date. The contract also contained a liquidated damages clause stipulating $3,721 as the amount that NIH could assess to Bell for each day that Bell failed to meet the completion date.
Approximately nine months into the construction, NIH decided to add a new floor to the building to accommodate the needs and demands of NIH researchers and scientists. Prior to this time, NIH had made relatively few changes to the contract, and the project was 13 days ahead of schedule. The addition of the new floor resulted in numerous changes, and the project was eventually delayed by 19 months. The direct impact of the added floor resulted in separate change orders for the steel and concrete work ($1.6 million and 30 days time extension), changes to the partial infrastructure or ‘shell’ design of the floor ($6.9 million and 30 days time extension) and the final design of the new floor ($1.8 million and 30 days time extension), making the new completion date to be September 28, 2000. After these changes, NIH represented that few subsequent changes would be issued, and asked Bell to agree to a series of new interim completion dates that would allow NIH to occupy the building on a phased basis. The parties then executed Modification 93 that increased the price by another $2.3 million, revised the completion date to April 30, 2001, and established
14 substantial completion milestones for the phased completion, between October 1, 2000 and April 30, 2001 with daily liquidated damages of $266 per day if Bell missed any of the 14 milestone dates. Modification 93 contained the following, and did not contain any reservation of rights for other claims, such as cumulative impact or loss of efficiency.

The modification agreed to herein is a fair and equitable adjustment for the Contractor’s direct and indirect costs. This modification provides full compensation for the changed work, including both Contract costs and Contract time. The
Contractor hereby releases the Government from any and all liability under the Contract for further equitable adjustment attributable to the Modification.

After Modification 93 was signed, NIH issued 113 additional modifications that incorporated over 200 extra work orders, many of which emanated from NIH’s scientific community, and the court noted that “the NIH project team had no ability to stop the NIH scientists from making changes.” In these modifications, NIH compensated Bell only for the direct costs and Bell was directed to perform the additional work without extending or impacting the project schedule or milestone dates. None of the modifications provided any compensation for cumulative impact or inefficiency costs, and Bell reserved its rights to such impact claims. Also Bell notified NIH that the continued issuance of changes would delay the project and that the only way to avoid impact to the schedule was for NIH to authorise acceleration of the work. NIH did not authorise an acceleration effort, and when Bell attempted to include acceleration costs in its change order pricing, NIH struck them out. NIH further withheld $100,000 from Bell’s payments “due to inadequate progress” and repeatedly asserted its right to assess liquidated damages if the milestone completion dates were not met.

The relationship between the parties became strained as NIH continued to issue changes, demanded compliance with the milestone completion dates, and even reneged on paying for changes that had been negotiated and accepted. The project was substantially complete on February 8, 2002 (some 589 days after the original contract completion date). Bell submitted to the NIH contracting officer a certified Request for Equitable Adjustment in the amount of $6.2 million for unpaid balance, unresolved changes, delays, labour inefficiency costs, profit on the claims, and five subcontractor claims. Bell’s claims were denied by the contracting officer, who also asserted NIH claims against Bell for liquidated damages, re-testing and estimated costs to remedy defective work. Bell filed a complaint in the United States Court of Federal Claims.

One of Bell’s claims was for the cumulative impact of the NIH changes. The original contract price was $63.6 million, and there were

$21.4 million in change orders, increasing the contract price by 34 percent. The court noted that changes of this magnitude were unusual for building construction projects. The court further noted that there were approximately 700 extra work orders that affected every floor on the project, and that NIH’s internal documentation reflected serious concerns regarding the extent of changes after Modification 93. The modifications did not specifically compensate Bell for the cumulative impact of the NIH changes and revisions, nor did the terms of the modifications expressly release NIH for liability for cumulative impact measure’ in the expert’s approach to the evaluation of the reasonableness of Bell’s estimated productivity. Further, the expert testified that the majority of ‘unearned’ labour hours or ‘inefficiency’ occurred after Modification 93 was executed, and that approximately 25 percent of Bell’s total labour hours expended on the project were due to the labor productivity loss caused by NIH changes. The expert determined that 80,317 hours were lost due to the impact of NIH changes, and calculated the total productivity loss from these NIH changes by multiplying these hours by the fully-burdened average labor rate of $33.50 and labour productivity claims.

At trial, Bell presented both fact  evidence concerning its productivity records and expert testimony to prove its claim for cumulative impact and lost labour productivity. In its project record-keeping practices, Bell tracked productivity by requiring its

“if the employer denies the additional time or money to perform changed work, but nevertheless continues the flow of change orders to the contractor, a chaotic project may result” to arrive at $2,690,649 in damages to Bell.

The court was satisfied that Bell’s expert had properly quantified the cumulative impact of the NIH changes by using Bell’s historical productivity data and project records for measuring earned and unearned labour hours. foremen to record each week the number of units of work installed, allowing Bell’s management to compare the actual time to install units of work against its estimates. Where more time was spent installing units than estimated, Bell deemed the time to be unproductive. Bell’s expert witness analysed Bell’s productivity level based upon the weekly records of units installed for each cost code, and determined the productivity level by comparing the actual labour expended to perform units of work. The expert testified that although Bell was adversely affected by the addition of the new floor, Bell performed this extra work at or near the same productivity rates originally planned for the project. The expert testified that Bell’s estimated productivity was reasonable and even added four percent to the baseline hours in his calculations, which the court noted added a ‘conservative

The court sustained Bell’s claim of $2,058,456 for the loss of efficiency resulting from the cumulative impact of NIH’s changes because of the ‘major, wholesale changes,’ the many renovations prior to move-in, and the failure to grant any time extensions for the changes. The combination of these factors created a classic environment for what has become known as the ‘cumulative impact’ upon labor inefficiency. Multiple change orders on a construction project potentially can be accommodated if the employer acknowledges that additional time and money will be required, and if the parties carefully plan the sequencing of the changed work. However, if the employer as here denies the additional time or money to perform changed work, but nevertheless continues the flow of change orders to the contractor, a chaotic project may result.

While the cumulative impact decision of recovery may have limited application outside of U.S. federal contract jurisdictions, it may be a potential basis of recovery for contractors who have experienced the impact of multiple changes, additions and extras without receiving any compensation for the impacts. For example, none of the 206 contract modifications issued on the NIH project included any payment or other consideration to the contractor for disruption, cumulative impact, or labour inefficiency. Similarly, none of the modifications contained any language explicitly waiving or releasing such a claim. The Bell BCI court’s decision that prior releases did not waive a subsequent cumulative impact claim was based on the facts – a careful presentation of the details of the parties commercial
relations; how the parties administered changes; when EWOs and modifications were prepared; what the parties communicated about the changes; and what contract work or earlier change each EWO and modification had affected. These facts convinced the Bell BCI court that earlier releases had not waived the later impact claim. While language sporadically appeared in some modifications purporting to reserve rights, the court said that no meeting of the minds between the parties ever occurred. For example, the court noted that many of the events relevant to the cumulative impact claim did not even arise until after the parties signed Modification 093. According to the court, prudent contracting parties would be specific in describing the exact scope of any release or reservation of rights. Thus, contracting parties should specifically deal with time and cost impacts, fully addressing these matters by the specific terms in the formal variation documents.

Barry Bramble is the new Regional Director at Trett Consulting’s Houston Office.