What Government Contractors Need to Know and Do After Hurricane Florence

Government Contracts Update

Date: September 17, 2018

Key Notes:

  • Read and understand the scope and requirements of the potentially applicable clauses in the contract.
  • Promptly notify the government’s Contracting Officer of the hurricane’s anticipated effects on upcoming deliveries or performance.
  • Document in as much detail as possible how the hurricane impacted contract performance.

The past several days have been difficult for many government contractors who were in the direct path of Hurricane Florence’s assault on the southeastern United States. In addition to the loss of lives and extensive property damage, hurricanes disrupt contractors’ performance of government contracts in a myriad of ways, often resulting in schedule delays, formal and informal/constructive changes to the government’s requirements, and shortages of and/or increases in the costs of materials and services. What follows is a brief discussion of what government contractors should know regarding how government contracts typically address these and other “aftermath” issues and some general advice regarding what they should do now to protect their interests in their contracts.

Schedule Delays and Time for Performance

Most government contracts have a schedule for the delivery of goods, the performance of services, or the completion of construction, and the contractor’s failure to meet the contract’s agreed-upon schedule can result in a default termination, the assessment of liquidated damages, or the imposition of other contract remedies. Fortunately, most government contracts also contain clauses that, if properly applied, will entitle the contractor to schedule relief due to the specific impacts of the hurricane or related flooding. The three keys to successfully obtaining such relief are:

  • to read and understand the scope and requirements of the potentially applicable contract clauses,
  • to promptly notify the government’s Contracting Officer of the anticipated effects of the hurricane on upcoming deliveries or performance, and
  • to document in as much detail as possible how the hurricane impacted contract performance.

Let’s start with the typical contract clauses that address “excusable delays,” because a hurricane will almost certainly meet the “beyond the control and without the fault or negligence of the contractor” criteria for such in the clauses. For example, Federal Acquisition Regulation (FAR) 52.249-8, Default (Fixed-Price Supply and Service), gives the government the broad right to terminate a contract for failure to perform on time, but subparagraph (c) also provides the following:

Except for defaults of subcontractors at any tier, the Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance the failure to perform must be beyond the control and without the fault or negligence of the Contractor. [Emphasis added]

Similar language may be found for construction contracts in subparagraph (b) of FAR 52.249-10, Default (Fixed-Price Construction), and in subparagraph (a) of FAR 52.249-14, Excusable Delays, for cost reimbursement contracts.

Hurricane Florence was certainly an “act of God.” For example, the Armed Services Board of Contract Appeals determined that Hurricane Hugo was an act of God in Johnson Controls World Services, Inc., ASBCA No. 49011, 96-1 BCA ¶ 28163. Moreover, Hurricane Florence caused severe flooding in many parts of Virginia, North Carolina and South Carolina and likely fits the generally accepted definition of “unusually severe weather,” i.e., weather that is abnormal compared to the past weather at the same location for the same time of year. See Cape Ann Granite Co. v. United States, 100 Ct. Cl. 53, cert. denied, 321 U.S. 790 (1943).

While the presence of these clauses might seem to settle the issue of “excusable delay” for most contracts, in some cases the contract might contain additional clauses that have the effect of shifting the risk of delays (or additional costs) due to adverse weather to the contractor. For example, in Con-Seal Inc., ASBCA No. 41544, 97-1 BCA ¶ 28819, the Board denied the contractor’s claim for hurricane preparation costs because a “storm protection clause” required the contractor to take precautions to minimize damage due to high winds. The obvious point here is that one must read the entire contract to ensure that it does not contain any additional language that might negate the effect of the “excusable delay” language in the standard FAR clauses.

The second key to obtaining schedule relief for the effects of Hurricane Florence will be to notify the government’s Contracting Officer of the hurricane’s impacts on contract performance and the need for such schedule relief. This should, of course, be done as promptly as possible and in writing, with as much detail as is currently available, so the Contracting Officer can consider the impacts and accommodate an extension by modifying the contract’s schedule. In other words, a schedule extension is not automatic, and it is normally much better to get ahead of the issue by negotiating a mutually acceptable time extension than it is to fight to overturn a default termination.

Finally, the third key to obtaining an appropriate schedule extension is to adequately document all of the hurricane’s effects on contract performance. It is up to the contractor to demonstrate what work was delayed by the hurricane, by the flooding it caused, and/or by any “acts of the Government in either its sovereign or contractual capacity.” Understandably, this may be difficult to do in the immediate aftermath of the hurricane or in cases where contractor property and records are lost or destroyed, but without a clear causal connection between the damages or delays caused by the hurricane and the effect on productivity or performance of key work, it is possible that a claim for excusable delay will be denied. For example, in Fraya S.E., ASBCA No. 52222, 02-2 BCA ¶ 35575, the Board denied the contractor’s claim even though Hurricane Georges blew the roof off the contractor’s offices and left the contractor without power for two weeks, because the contractor was already several months behind schedule in performing the work. Schedule relief has also been denied in cases where the contractor could have and should have ordered materials from its suppliers well before the hurricane hit, and when the contractor failed to take appropriate measures to protect property. But where there is a clear causal connection between the hurricane’s effects and the performance of the contract work, contemporaneous documentation of the connection may be critical to not only successfully obtaining a contract modification to extend the contract schedule but also avoiding a default termination.

Increased Costs of Performance

In addition to schedule relief, in some cases the contractor may be entitled to recover its increased costs of performing the contract work. This may be due to, for example, “acts of the Government in either its sovereign or contractual capacity,” such as when the government orders a mandatory evacuation from a geographic area that includes the construction contract’s job site (and thus impacts both the schedule and demobilization/mobilization costs) or when the government’s Contracting Officer orders the contractor to perform additional or different work that is not within the contract’s existing requirements.

However, in many instances the contractor will not be entitled to a cost or price adjustment because the parties have, through their agreement to and application of standard FAR clauses in the contract, allocated the risk of loss or increased cost to the contractor during contract performance. For example, for work in progress that has not yet been accepted by the government, the contractor will normally bear the risk of damage to the work. FAR 52.246-16, Responsibility for Supplies, states in subparagraph (b) that “unless the contract specifically provides otherwise, risk of loss or damage to supplies shall remain with the Contractor until…delivery…or acceptance by the Government….” For construction contracts, FAR 52.236-7, Permits and Responsibilities, states in part that the contractor shall “be responsible for all materials delivered and work performed until completion and acceptance of the entire work….” In Joseph Beck & Associates, ASBCA No. 31126, 88-1 BCA ¶ 20428, aff’d 864 F.2d 150 (Fed. Cir. 1988), the Board stated that if “work in process is damaged, the contractor’s responsibility is to restore it without compensation.”

Similarly, invoking the FAR 52.236-2, Differing Site Conditions, clause to obtain an equitable adjustment due to changed conditions caused by a hurricane has proven to be problematic. Without more, a hurricane as an “act of God” is not itself a differing site condition. In Kilgallon Construction Co., ASBCA No. 51601, 01-2 BCA ¶ 31,621, the Board stated that the contractor must prove that the interaction of the act of God with a pre-existing and unknown physical condition (either a subsurface or latent condition that differed materially from those indicated in the contract, or one of unusual nature that differed from those ordinarily encountered) caused the unforeseeable and thus compensable increase in costs to perform.

So while trying to recover increased costs of performance due solely to a hurricane’s effects may be difficult or precluded under the contract’s terms, as mentioned above, the government sometimes asks or requires the contractor to perform additional or different work as a result of the hurricane, and this increased or additional work constitutes a change to the contract. Under the changes clause in the contract, such as FAR 52.243-1, Changes—Fixed Price, the contractor will be entitled to an equitable adjustment of the contract price, which is measured by the difference between what it would have cost the contractor to perform the work as originally required before the hurricane, and what it actually cost to perform the work as changed by the government after the hurricane. But be careful here, as the change must be ordered by someone who is authorized to make changes to the contract, which typically means that the order must come from the government’s Contracting Officer. So direction from other government officials, which often comes during emergency situations, may not be binding on the government, and a contractor that relies on it without confirmation from a Contracting Officer may be put at risk of not being able to recover its costs of performing the new or changed work. The best practice in these situations is to document any direction received from any government official, and then confirm in writing the direction with the government’s Contracting Officer. And of course, continue to document the direction’s impact on the work, as well as its associated costs, because the contractor always has the burden of proving both that the contract was changed by an authorized official and the amount of its costs caused by the change.

Conclusion

During and immediately after a catastrophic event such as Hurricane Florence, it is understandable that government contractors have many higher priorities (e.g., protection of lives and property) than thinking about their contractual rights. But once such threats subside, the real work of promptly identifying and documenting the hurricane’s effects on the contractor’s contract schedules and costs must not be forgotten or ignored. Diligence in this effort, along with understanding the contract’s clauses and how they may impact both schedule relief and cost recovery, become essential to ensuring that the contract does not become more damaging to the contractor’s business than the hurricane itself.

FOR MORE INFORMATION

For more information, please contact:

Joseph R. Berger
202.263.4193
Joseph.Berger@ThompsonHine.com

Tom Mason
202.263.4168
Thomas.Mason@ThompsonHine.com

Ray McCann
202.263.4152
Ray.McCann@ThompsonHine.com

Francis E. Purcell, Jr.
202.263.4118
Chip.Purcell@ThompsonHine.com

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