ConstructionPro Week, Volume: 3 - Issue: 5 - 01/31/2014

Should Federal Project Owners Protect Contractors from Rogue State Regulators?

By Bruce Jervis

The “Permits and Responsibilities” clause is found in every federal construction contract. It requires contractors, at no additional expense to the government, to comply with any federal, state, or municipal law, code, or regulation applicable to the performance of the work. Reasonable enough; code compliance is an inherent aspect of performing construction work. Few contractors realize, however, the scope of the risk that is allocated under this clause.

On a federal prison project in New Hampshire, state environmental regulatory authorities imposed limitations and restrictions on cut-and-fill activities, which greatly increased the contractor’s estimated costs and performance time. Perhaps some of these limitations should have been anticipated by the contractor, but many of the restrictions appear arbitrary and unreasonable.

The contractor contended the federal agency should pay for the increased costs. The contractor said the agency had an obligation to intervene with state authorities on the contractor’s behalf but failed to do so. The U.S. Court of Appeals for the Federal Circuit rejected this argument. The Permits and Responsibilities “clearly and unambiguously allocated the costs for complying with all permit requirements to [the contractor].”

What do you think? It is frequently said the federal construction contract documents include an implied obligation of good faith and fair dealing. Does that extend to federal intervention on behalf of federal contractors when state or local regulatory officials appear to exceed their authority or act arbitrarily? I welcome your comments.

COMMENTS

Just a general comment.

In the scope of most construction projects especially larger and complex projects it is impossible to anticipate and foresee all possible conflicts and scenarios. Contractors are in the business of building buildings. Contractors should be legally responsible for the work they perform but not oversights by contracting authorities who have not made a thorough effort of researching the requirements of their projects with the design team before beginning work.
Posted by: Dale Winovich - Friday, January 31, 2014 10:31 AM

This is a tough one--in both the public and private sectors. Generally speaking, the risk of cost increases and delays should be allocated to the party best able to manage and control the risk. In a tough market, however, these types of risks end up in the lap of the party with less bargaining leverage and/or poor understanding of the nature of the risk. A fair approach would be to declare 'unreasonable' or 'unusual' interference by a local official to be a Force Majeure, with any related delays excused but not fully compensable. The parties can negotiate the particulars of the compensation for delays and extra costs (same as any other force majeure scenario), and also decide in advance what constitutes 'unreasonable' or 'unusual' actions by authorities. Is the the fire marshall asking for 50 additional exit signs in odd places during the final CO walk-thru?
Posted by: Mike Peters - Friday, January 31, 2014 10:46 AM

It appears to me that the court misunderstood that the additional scope of work was not a permit condition but an omission by the civil engineers and owner to thoroughly investigate state limitation so they could be indicated on the documents. The clue is stated in the article above that the state environmental regulatory authorities imposed limitations and restrictions on cut-and-fill activities, so why weren't these restrictions address by the civil engineer's grading plan?
Posted by: Eddie Tims, AIA, CSI - Friday, January 31, 2014 12:45 PM

It's certainly confusing on a federal project as certain state building codes may not apply but other state laws or regulations will apply. In the example given I don't think it's clear that the Design Professional omitted required information. If the "result" was not indicated that is an omission, but it seems the example could be related to a means/methods issue (or the "how" in getting to the required result). It's not the Design Professional's (or Owner's) responsibility to indicate every applicable provision of codes...nor to provide Contractors with a copy of codes, laws, and regulations. If the state authority actually required something that was not in any code or law then I think the Contractor should have a valid claim.
Posted by: Michael Quinn - Friday, January 31, 2014 1:24 PM

A couple responses/clarifications: The state permitting did not affect the design. It affected the means and methods of performing the cut-and-fill operation. Some of the regulatory restrictions (maximum number of acres of disturbed area) could and should have been researched and discovered by the contractor prior to bid submission. But some of the restrictions were imposed by state personnel who seemed to be acting arbitrarily and outside regulatory authority. The federal agency refused to intervene to attempt to curb this behavior.
Posted by: Bruce Jervis - Monday, February 3, 2014 9:37 AM

This is gray area, but there are many good reasons for the federal government / owner to stay out of it. If the feds jumped in (and where would that end?), they would only muddy the waters and open themselves for lots of other lawsuits from all directions. Their money is our money, so why would we want that? Plus, the environment belongs to everyone and it is our responsibility to protect it, and lawsuits have lots of longer-term consequences including legislative and procedural changes that sometimes remove the teeth from environmental protections- again, why would we want that? Makes absolutely no sense for them to try to interfere, and there is no guarantee it would turn out well.

Besides, contractors routinely claim that clients of all sizes and types try to "tell them how to do their job" and have won plenty of lawsuits over the issue of means and methods. If the feds had interfered with the locals and it had not turned out well for the contractor after all, he could then sue the feds for additional time and costs.

Forget it. The contractor gets paid the big bucks because he signs a piece of paper that states that he Understands and Undertakes the risks of the project. The federal personnel and their design subcontractors do not share in the risks and rewards of such an undertaking, and rightly so, as this opens all sorts of doors for fraudulent activity. Instead, they work under their own contracts or work agreements, independently of the contractors, and they bear their own risks, which definitely include arbitrary and punitive behavior by state and local authorities. The risk of performing construction under local conditions is entirely undertaken by the bidders for the construction, with exemptions and compensation for unforeseen risks. (Whether or not the local jurisdiction's behavior should be one of those is a different discussion, and has merit in its own right.) The contractor can always sue the locals for unjustified interference- another thing they frequently do. Again- theirs are the rewards and theirs are the risks. You win some and you lose some. They carry insurance and they build margins into their costs to cover their risks and leave some for profit. When they make out well, they don't share it unless the contract specifies that. So the contract is the key to all of this, and any two parties can put anything legal into a contract.

Posted by: Art Gibert - Tuesday, February 4, 2014 1:17 PM