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Government Contractors, Beware the Ever-Tightening Contract Enforcement

Daily Journal of Commerce
October 2, 2015

Overview

In the years leading up to the Great Recession, commercial construction work was plentiful. Federal, state and local government coffers were flush with tax receipts; and the bounty of work meant that contractors had strong leverage in negotiating contracts, changes and claims.

The recession and its aftermath changed all that. The dearth of both commercial and public work shifted the balance of power in contract negotiations so that owners were much more able – and willing – to impose much more restrictive payment, insurance, notice and other requirements.

Even though the recession has ended, government owners in particular have continued these restrictive – some might say Draconian – practices. Contractors who perform work on government projects would be wise to recognize these contract provisions and practices, and to prepare accordingly, in preparing bids or proposals, selecting and managing subcontractors, and managing their operations during the course of construction. Failure to be mindful of the "gotchas" in a public works contract can leave contractors performing extra work without compensation, eating their internal costs for delays caused by others, or facing liquidated damages in circumstances where the owner previously gave routine time extensions.

Courts in both Oregon and Washington have adopted a rule of "strict adherence" when it comes to the interpretation of contract terms. This comes into play most often when a contractor is requested or directed to perform extra work, but does not seek or obtain a change order or contract modification exactly as required by the contract, either because it is not documented correctly or it is not submitted in a timely manner. Traditionally, contracting parties would "work it out" at the end of a project, even if there was a dispute over scope or amount. That practice is largely a thing of the past. Now, if the change is not properly documented, an owner can refuse to pay for the work, unless the owner has somehow waived the contract requirement. This puts the onus on the contractor to make sure it carefully follows the contract procedures to be paid for such changes.

Public owners are imposing increasingly strict rules on contractors in other ways as well. For example, some owners have begun imposing record retention requirements that mandate that a contractor keep all records related to a given project in a particular way, or waive any claims related to the project. In and of itself, this is not problematic; contractors have always had the obligation as well as the practical need to keep records of their work. However, some owners have gone a step further and are now requiring that prime contractors take affirmative steps to ensure that all of their subcontractors, sub-subs, and suppliers also adhere to the required record-keeping rules. That means that the prime contractor is now potentially in the business of monitoring its subcontractors' internal business practices. The consequences of failing to do so can be that the contractor's right to be paid for disputed items could be waived, even for meritorious claims, simply because a subcontractor did not properly keep records that may or may not be related to the disputed claims.

Another example of public owners' stricter – some might say unreasonable – approach to contract operations is a recent notice issued by the Oregon Department of Transportation in which the agency notified contractors that it would no longer issue extensions of time to complete paving projects at the end of the construction season. In other words, when the paving season ends, ODOT will begin to assess liquidated damages, even in circumstances where ODOT acknowledges it has routinely granted contract time extensions to allow paving work to be completed the following spring to avoid the potential for paving work being performed during adverse weather.

For contractors working for government agencies, these trends mean a few things. First, contractors need to know and understand how risk-shifting, notice and payment provisions will work in practice when bidding or proposing on work so they can account for the costs and risks they will be undertaking.

Next, contractors should have well-trained personnel who carefully document and communicate all events for which delay or change notices may be needed to ensure that all contract requirements are strictly adhered to.

Finally, contractors should not expect an agency will continue to act reasonably simply because "that's how it's always been done." Public owners have been signaling for some time that they intend to require strict adherence to contract language, whether reasonable or not. Prudent contractors would do well to listen.

Originally published in DJC Oregon on August 26, 2015

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