In an April 22, 2020 decision, Pernix Serka Joint Venture v. Department of State, the Civilian Board of Contract Appeals (CBCA) denied a contractor’s claim for additional costs it incurred under a firm, fixed-price contract. This was following an outbreak of the Ebola virus interrupted its work and increased its costs of completion. The decision came up on the Government’s motion for summary judgment. It individually addressed the contractor’s arguments that either a cardinal or constructive change occurred, but concluded that a firm, fixed-price contract places the risk of such unexpected costs on the contractor.
The holding is notable for two reasons. First, the timing of the CBCA’s release of its decision is unusual since it comes in the midst of a world-wide pandemic stemming from coronavirus and COVID-19. Second, the CBCA’s decision sends a signal to many federal government contractors currently navigating their way through that pandemic that even these rare circumstances may not allow contractors to obtain cost adjustments due to pandemic-related costs.
The Facts.
The contractor in Pernix Serka Joint Venture (PSJV), had a firm, fixed-price contract with the Government to construct a rainwater capture and storage system in Freetown, Sierra Leone by November 2014. During the summer of 2014, when PSJV had completed only sixty-five percent of the project, the Ebola epidemic, then spreading through Western Africa, reached Freetown. After PSJV requested direction from the Contracting Officer (CO) on how to proceed, the CO informed it that the procuring agency, the United States Department of State (DOS), had not ordered departure for its local staff. Because of that, the CO noted that she could not tell PSJV to leave the project. Instead, the CO told PSJV that it was “solely” up to the contractor to decide if its people were to stay or leave at that time. The CO also cautioned that the safety of PSJV’s staff “should be of the most utmost [sic] concern!”
Following that exchange, the World Health Organization (WHO) declared an “international public health emergency.” PSJV shut down its project and directed all personnel in Sierra Leone to evacuate. It also notified the Government of its decision to temporarily do so. In response, the State Department informed PSJV that it viewed that decision as unilateral and “perceive[d] no basis upon which [PSJV] could properly claim an equitable adjustment from the Government with respect to additional costs [it would] incur in connection with [its] decision to curtail work on this project.” PSJV and the State Department met several times thereafter to discuss the ongoing crisis, where “PSJV continued to request guidance from DOS and expressed frustration that DOS would not provide any.” Instead, the Government continued to insist that “the decisions for any action on the way forward, which is related to PSJV employee[s] and their life safety for return to Freetown, [would rest solely with] PSJV.”
Eventually, PSJV contracted “for basic medical facilities and services on the project site” and returned to work. Following an unsuccessful request for equitable adjustment (REA), PSJV filed a claim for:
(1) “additional life safety and health costs incurred due to differing site conditions, disruption of work and the need to maintain a safe work site,” and
(2) “additional costs incurred [from] that disruption of work, and the need to demobilize and remobilize at the work site.”
The State Department responded to PSJV’s appeal of the CO’s denial of PSJV’s claim by filing a motion for summary judgment. In that motion, the State Department argued that because PJSV had a firm, fixed-price contract, it “assumed the risks of any unexpected costs not attributable to the Government.” The CBCA agreed.
The Decision.
Siding with the State Department, the CBCA held that PSJV did not identify “any clause in the contract that served to shift the risk to the Government for any costs incurred due to an unforeseen epidemic.” It also noted that the contract did not “require the Government to provide PSJV with direction on how to respond to the Ebola outbreak. Thus, under a firm, fixed-price contract, PSJV must bear the additional costs of contract performance, even if PSJV did not contemplate those measures at the time it submitted its proposal or at contract award.”
-Cardinal Change-
The CBCA flat-out rejected the contractor’s argument that a “cardinal change” had occurred, because the Government expected its work to continue in “Ebola crisis conditions without [providing any guidance], or a suspension of work,” while forcing the contractor to incur increased costs for added life safety measures.
The CBCA added that the “[increased] life safety measures after remobilization did not alter the nature of the thing [that PSJV] had contracted for; [it] remained obligated to perform at the fixed price.”
-Constructive Change-
The CBCA also found no merit to the contractor’s argument that the “demobilization and remobilization of its personnel and the additional site safety measures put in place due to the Ebola outbreak should be considered constructive changes made by the Government, thus entitling PSJV to an equitable adjustment for the increased costs.” In a brief denial of that argument, the CBCA focused in on the fact that “PSJV acknowledge[d] that DOS did not give it directions or orders to evacuate the project site.” As such, the Board concluded that:
“PSJV [simply failed] to demonstrate a constructive change because no change to the contract occurred. PSJV remained obligated to perform throughout the performance period, and the Excusable Delay clause provided for additional time, but not additional money.”
–Constructive Suspension of Work-
The contractor asserted a constructive suspension of work argument in its response to the Government’s summary judgment motion. The CBCA, however, refused to address this argument on jurisdictional grounds.
The Impact.
The Pernix decision should, of course, be concerning to the many federal contractors currently dealing with the impacts of the COVID-19 pandemic on the work under their own firm, fixed-price contracts. But while Pernix suggests that the CBCA may not be open to some claims for pandemic-related costs, it does not foreclose the possibility that contractors may still be able to recover such costs.
Indeed, it is critical to consider the deciding factor for this Board decision was the fact that PSJV ended up being forced to act without the Government’s direction. In addressing the COVID-19 pandemic, however, most agencies, Government facilities, and many contracting officers have provided their own direction to their contractors, which the Boards and other tribunals may view very differently. In addition, this pandemic has had, or likely will have, a much broader impact on the labor, material, equipment, and supply chains, than did the Ebola outbreak.
And, in some cases, there may still be a constructive suspension argument available as well, if the Government did not invoke the Suspension of Work clause. Even if the alternative were true, Congress has passed additional authority, via the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Section 3610 and the Families First Coronavirus Response Act (FFCRA), which may entitle contractors to a recovery of some costs that they incur as a result of the COVID-19 pandemic. Under certain circumstances, Section 3610 of the CARES Act affords the CO discretion to reimburse the contractor for paid leave to workers, and the FFCRA allows for tax credits, in both instances, if certain conditions are met.
Simply put, while this decision reminds contractors to be aware of the risks that they face when they act without any Government direction, at least some of those dealing with the effects of the COVID-19 pandemic may still be able to recover the costs that they incur in doing so.
This article first appeared on the Smith Currie website on April 24, 2020