Who Bears the Blame in Federal Contract Disputes?
When Fluor Intercontinental, a unit of the big engineering and construction services company, won a $74.4-million contract in early 2005 to build a new U.S. embassy compound in Haiti's capital, Port-au-Prince, it ran into trouble with soil conditions that differed from what the firm believed would be present. Fluor had sought a full 51% of the original contract value—$38 million—for extra costs that included additional security. In 2013, the Civilian Board of Contract Appeals seemed to recognize Fluor's point about extra costs, but in contract disputes, winning on principle can still leave a company with empty pockets: The board awarded Fluor only $1.2 million.
Fluor is one of a number of contractors that wound up either losing cases or coming up short in damage awards in contract disputes with government agencies, according to a new study of 107 disputes by the Construction Financial Management Association. Design-build contracts, surprisingly, provided no measurable protection to the contractors when disputes arose, the study found.
Initiated by the Princeton, N.J.-based association as a way to determine where the fault in troubled federal public-works projects belonged, the study provided a more textured picture of controversial projects than can be gathered from anecdotes and news stories.
While contractors were at least partially vindicated just under half the time, they were far less likely to win in the larger cases with more money at stake, the CFMA study found. The average damages as a percentage of contract value came to only 6.9%—placing Fluor's embassy claim outside the average.
Contractors succeed in winning claims more often when federal agencies change specifications midway in a project.
Misunderstandings on specifications often trigger disputes, too. What surprised the study's principal author most is that design-build provided no real advantage in positioning contractors to prevail in front of the contract appeals board. "One would have thought that contractors might have a better chance of winning with design-build because there is more up-front documentation," notes Anirban Basu, CEO of Sage Policy Group, which conducted the CFMA study.
Contractors who inked design-build contracts prevailed or won a split decision in court or in front of an agency administrative panel just 32% of the time. That percentage compares to a 45% success rate among contractors that used the traditional design-bid-build process.
The issues that eventually wound up in court often happened after the initial design process, with construction already underway, the CFMA study found.
Such was the case with Fluor, which won the Port-au-Prince embassy work in 2005 under a design-build contract but, later, ran into serious difficulties after work began on the embassy.
While government agencies can't be totally absolved from the responsibility to disclose "superior knowledge" about changed project conditions, contractors that take on fixed-priced contracts, a hallmark of design-build, "assume a significant amount of risk," the CFMA study notes.
Fluor altogether exited the embassy construction business in late 2006, reporting $133 million in losses during the third quarter that year on government projects across the world. One danger of design-build is that it may make contractors overconfident about the state of communications with the government agency with which they are dealing, as efforts ease off after the design is complete and work begins, notes J. Brad Robinson, CFMA chairman.
"It may be [that], having communicated so much before the project begins, the project manager may become a bit lax communicating during the project," Robinson says. "That may be the most important time to communicate."
Beyond the design-build controversy, the CFMA study highlights other problems dogging contractors when they wind up in court—chief among them, poor documentation.
Too often, disputes between contractors and government agencies degenerate into a battle over whose memory of the event is the most accurate—a project manager for the contractor or the agency official overseeing the work, Basu says.
A common trigger for disputes is a change in a specification that is "either not properly articulated/communicated or that requires some level of countervailing financial consideration that is not offered," the report states.