What Happens When Funding Runs Out for Your Project?

Hall of Fame Philadelphia Eagles radio man Merle Reese once saw a play that seemed improbably — and perhaps against the rules — to which he disclaimed “he can’t do that!  Yes, he can do that!”  You might be thinking the same thing when you receive notice from your federal government client that the project is being shut down for lack of funding and you will be paid only for the work already in place.  This is a hard pill to swallow because your profit may not have come until a later part of the project that now will not be completed.

Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract.  Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience.  However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.

Yet, there are three exceptions to this general rule:  (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.

Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.   The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases.  In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.

Termination for convenience clauses are just another factor you need to deal with in performing public work.  As is usually the case, yes the government can do that.

Are You Violating The False Claims Act?

One of the great things about living in a large city is being able to walk everywhere.  I like walking because it is when I do my thinking.  Sometimes I do too much thinking that it causes me to walk several blocks past my intended location. We sometimes lose focus on what is happening around us while we are focused on the task at hand.  It is easy to lose focus on the bigger picture on a complex construction project with its multiple moving parts, men, and material.  Unfortunately, the consequences of losing your focus on a construction project are much worse than simply walking past your intended location.

In recent years, federal prosecutors have raised the stakes for contractors that lose focus on a construction project.  One area where you can easily lose focus is in complying with the multiple federal laws that apply to the project.  Under the False Claims Act, contractors — and their executives — can be prosecuted for failing to assure that their subcontractors are following certain those laws.

A False Claims Act violation occurs when a person “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the Government.”  Importantly, unlike common law fraud, the government need not show that you intended to defraud the government when you submitted your claim.  The false certification need not be an expressly false statement for there to be a False Claims Act violation.  Under the implied certification theory of liability you can be liable for violating the “continuing duty to comply with the regulations on which payment is conditioned.”

The case U.S. ex rel. Wall v.Circle C Construction, LLC, is a good example of what can happen when you fail to make sure that your subcontractors are following federal regulations before submitting an application for payment.  The defendant, Circle C Construction, had a contract with the Army to perform work on buildings at Fort Campbell in Tennessee.  Prosecutors claimed that Circle C violated the False Claims Act by submitting applications for payment falsely claiming that all of its subcontractors paid prevailing wages under the Davis Bacon Act.

As is typically the case, Circle C’s contract with the Army required Circle C and its subcontractors to pay prevailing wages, to submit certified payroll showing the payment of prevailing wages, to insure its subcontractors complied with the Davis Bacon Act, and to assure that the certified payroll submitted to the Army was accurate and complete.

Circle C, however, neglected to submit certified payroll for its electrical subcontractor, Phase Tech.  The reason for the failure to submit accurate certified payroll for Phase Tech was not because of some scheme to defraud the government by Circle C, rather, it was Circle’s C sloppiness in determining who was working on the project.  In other words, it was not intentional. However, intent was not required because the court applied the implied certification theory of liability and found against Circle C and awarded the government over $500,000 in damages, which it then trebled (tripled) under the False Claims Act, for a total damage award in excess of $1.5 million.

The Circle C case is just one example of easily you can run afoul of the False Claims Act by failing to be diligent that you and your subcontractors are following the federal laws and regulations regarding your project.  Other examples where contractors have run into similar False Claims Act issues are when it fails to assure that federal DBE rules are being complied with on a project.   You should be particularly concerned about the False Claims Act because False Claims Act prosecutions have nearly doubled over the last few years and there have become “en vogue” for federal prosecutors.

Is Your Disparity Study Accurate?

(This guest blog post from John Sullivan, Esquire, a Baltimore lawyer who specializes in DBE and MWBE disparity studies. John’s website is Croson Legal Services.  He can be reached via email at jcharlessullivan@yahoo.com)

For more than two decades it has been true that subcontracting goals – Disadvantaged Business Enterprise goals on federal work and Minority and Women Owned Business Enterprise goals on state and local contracts – must be supported by a disparity study. More than 300 of these studies have been completed around the country to support various DBE and MWBE programs.  Without a viable disparity study, DBE programs are subject to constitutional challenge.  However, just how credible are the disparity studies that state and local government rely upon?

Take for example the Austin, Texas based economic consulting firm, NERA, who finds itself is serious trouble for the disparity studies it produced.  NERA produced dozens of the disparity studies for state and local agencies such as SEPTA, the City of Baltimore, New York State, Hawaii DOT, and the City of Cleveland.

Cleveland awarded NERA a $758,000 no bid contract to complete a disparity study intended to support the city’s MWBE program. It turns out that large chunks of the study were cut and pasted from other NERA studies.In fact, the 36 page legal section of NERA’s Cleveland study is a word for word copy of the legal section done for the Missouri DOT. NERA did not conduct new surveys for Cleveland, instead relying on survey answers for a study done on behalf of the Northeast Ohio Regional Sewer District. One sentence in the Cleveland study referred to the “Houston market area” when the study meant to be discussing Cleveland.

The Cleveland Plain Dealer has run a series of articles on the NERA study. The president of the local Black Contractors Association announced, “Fraud has been perpetrated here.” The Plain Dealer dismissed the study as “slickly repackaged recycling.”

The heart of all disparity studies is the determination of availability – what percentage of contractors who are qualified, willing and able to complete public work are MWBEs or  DBEs? NERA disparity studies apply a headcount approach to availability. All construction firms, regardless of size, are considered the same. The reality that only big construction firms can complete the biggest construction contracts is ignored.

The NERA disparity study for Cleveland concluded that there was sufficient evidence of discrimination to justify continuation of the city’s MWBE program. The City Council agreed. Two lessons are to be learned here.

The first is that a disparity study cut and pasted together is not, or at least should not be, evidence of discrimination justifying preferences in public construction contracts. The law and a sense of fairness require that if there are to be preferences in local contracting, evidence of discrimination in local contracting is needed. Evidence from other parts of the country should not suffice.

The other lesson is that politicians voting on disparity study-based programs don’t really understand what they are voting on. To be fair, disparity studies are often long (the Cleveland study exceeds 700 pages) and complicated documents. Few decision makers have the time, interest, or expertise to read the studies.

Exploding Pipeline (Construction) and Differing Site Conditions

We are witnessing an explosive growth of newly constructed pipelines to carry shale oil and natural gas.  This is a tremendous opportunity for contractors looking for new markets to grow revenue.  Because pipeline construction is happening in many areas for the first time in decades, for many contractors it is probably  the first time they have worked a pipeline construction project.  However, this is not the case for the owners of the pipelines.  They are seasoned pipeline construction veterans who have been building pipelines for years.  Their contracts reflect the battle scars of past disputes and shift as much risk as possible to the contractor.

Pipeline construction clearly involves a lot of digging.  Where there is digging, there is the unknown of what lies in and below what is being dug.  To address this risk, pipeline owners will include in their contract a differing site conditions clause.  Generally, these clauses disclaim any warranty or representation as to what you will encounter once you start excavation and shift the risk to the you if what you encounter is different than what the contract (or bid) documents represented you should expect to encounter.  When a differing site conditions clause like this appears in your contract, you cannot recover additional costs because you encountered conditions that you did not expect, like addition or different rock, soil, or (as the case below) existing pipeline crossings.   (This is not typically the case for projects performed for the federal government )

El Paso Field Services v. Mastec North America, involved the construction of an underground gas pipeline.  El Paso’s bid package showed only 280 “foreign crossings” (crossings of other existing pipelines along the proposed pipeline right of way) when there were actually 794.   Mastec sought compensation for the additional costs associated with encountering the 594 additional crossing.  The contract, however, contained several sections that broadly addressed differing site conditions and that shifted the risk entirely to Mastec causing the court to deny Mastec’s claim.

If pipeline construction is a new field for you, be aware of what your contract says about differing site conditions.