By G. Scott Walters and Alexander Gorelik

Law360 (June 2, 2020, 5:29 PM EDT) --

Scott Walters

Alexander Gorelik

In an April 22 decision, Pernix Serka Joint Venture v. Department of State, the Civilian Board of Contract Appeals denied a contractor's claim for additional costs it incurred under a firm fixed-price contract, after an outbreak of the Ebola virus interrupted its work and increased its costs of completion.

The decision, which followed the government's motion for summary judgment, addressed the contractor's arguments that either a cardinal or constructive change to the contract occurred, but ultimately the CBCA concluded that a firm fixed-price contract places the risk of such unexpected costs on the contractor.

The holding is notable for at least two reasons. First, the timing of the CBCA's release of its decision is unusual since it comes in the middle of yet another worldwide pandemic, which stems from the COVID-19 disease. Second, the CBCA's decision signals that even these rare circumstances may not always allow federal contractors to obtain cost adjustments for increased costs incurred during contract performance to deal with such emergencies.

The Facts

The contractor in Pernix, PSJV, had a firm fixed-price contract with the government to construct a rainwater capture and storage system in Freetown, Sierra Leone, by November 2014. During PSJV's performance, the Ebola epidemic, which was spreading through Western Africa in the summer of 2014, reached Freetown.

Growing concerned about the impact of this epidemic to its project, PSJV requested direction from the contracting officer on how to proceed. The CO responded that it was solely up to the contractor to decide if its people were to stay or leave at that time. However, she cautioned that the safety of PSJV's staff "should be of [utmost] concern!"

Shortly thereafter, the World Health Organization declared an international public health emergency and PSJV shut down its project and directed all personnel in Sierra Leone to evacuate. It also notified the government of its decision to temporarily do so. In response, the State Department informed PSJV that it viewed that decision as unilateral and "perceive[d] no basis upon which [PSJV] could properly claim an equitable adjustment from the Government with respect to additional costs [it would] incur in connection with [its] decision to curtail work on this project."

PSJV and the State Department met several times thereafter to discuss the ongoing crisis, where "PSJV continued to request guidance from DOS and expressed frustration that DOS would not provide any." Instead, the government continued to insist that "the decisions for any action on the way forward, which is related to PSJV employee[s] and their life safety for return to Freetown, [would rest solely with] PSJV."

Eventually, PSJV contracted for basic medical facilities and services on the project site and returned to work. Following an unsuccessful request for equitable adjustment, PSJV filed a claim for (1) additional life safety and health costs incurred due to differing site conditions, disruption of work and the need to maintain a safe work site, and (2) additional costs incurred [from] that disruption of work, and the need to demobilize and remobilize at the work site.

The State Department responded to PSJV's appeal of the CO's denial of PSJV's claim by filing a motion for summary judgment. In that motion, the State Department argued that because PJSV had a firm fixed-price contract, it "assumed the risks of any unexpected costs not attributable to the Government." The CBCA agreed.

The Decision

Siding with the State Department, the CBCA held that PSJV did not identify any clause in the contract that served to shift the risk to the Government for any costs incurred due to an unforeseen epidemic. The CBCA also noted that the contract did not require the government to provide PSJV with direction on how to respond to the Ebola outbreak.

Thus, under a firm fixed-price contract, PSJV must bear the additional costs of contract performance, even if PSJV did not contemplate those measures at the time it submitted its proposal or at contract award.

Cardinal Change

The CBCA flat-out rejected the contractor's argument that a cardinal change had occurred, where the government expected PSJV's work to continue in "Ebola crisis conditions without [providing any guidance], or a suspension of work," while forcing the contractor to incur increased costs for added life safety measures.

As the CBCA explained, any changes to the contractor's work were not the result of the government's actions. Indeed, the board pointed out that:

Despite the difficulties encountered during the Ebola outbreak, the Government never changed the description of work it expected from the contractor. Throughout communications with PSJV, the Government repeatedly stated that it would not give directions to the contractor on how it should respond to the ongoing outbreak, instead leaving the decisions solely in the hands of the contractor. Any changes in conditions surrounding performance of the contract arose from the Ebola outbreak and the host country's reaction to the outbreak.

Constructive Change

The CBCA also found no merit to the contractor's argument that the "demobilization and remobilization of its personnel and the additional site safety measures put in place due to the Ebola outbreak should be considered constructive changes made by the Government, thus entitling PSJV to an equitable adjustment for the increased costs."

In a brief denial of that argument, the CBCA focused in on the fact that "PSJV acknowledge[d] that DOS did not give it directions or orders to evacuate the project site." As such, the board concluded that "PSJV [simply failed] to demonstrate a constructive change because no change to the contract occurred. PSJV remained obligated to perform throughout the performance period, and the Excusable Delay clause provided for additional time, but not additional money."

Constructive Suspension of Work

PSJV asserted a constructive suspension of work argument as well, but the CBCA refused to address that position on jurisdictional grounds.

The Impact

The Pernix decision should, of course, be concerning to the many federal contractors currently dealing with the impacts of the COVID-19 pandemic on work under their own firm fixed-price contracts. But while Pernix suggests that the CBCA may not be open to some claims for pandemic-related costs, it does not foreclose the possibility that contractors may still be able to recover such costs.

Indeed, it is critical to consider that the deciding factor for this board decision was the fact that PSJV ended up being forced to act without the government's direction. The board's focus on this point suggests that cases where federal contractors seek compensation for actions that they undertook in advance of any government direction will continue to be the most challenging claims to prosecute.

In addressing the COVID-19 pandemic, however, most agencies, government facilities and many contracting officers have provided their own direction to their contractors, which the boards and other tribunals may view very differently. In addition, this pandemic has had, or likely will have, a much broader impact on the labor, material, equipment and supply chains, than did the Ebola outbreak. As such, it is likely that contractors may still be able to distinguish the circumstances that they find themselves in during the COVID-19 pandemic from the facts of the Pernix decision.

Of course, the decision does suggest that the government may increasingly try to avoid providing contractors with direction one way or the other, where possible, in similar circumstances. Although, in at least some such cases, contractors may still have a constructive suspension argument available, if the government did not invoke the suspension of work clause. And, even if the alternative were true, Congress has passed additional authority, via the Coronavirus Aid, Relief, and Economic Security Act's Section 3610 and the Families First Coronavirus Response Act, which may entitle contractors to a recovery of some costs that they incur as a result of the COVID-19 pandemic.

Under certain circumstances, Section 3610 of the CARES Act affords the CO discretion to reimburse the contractor for paid leave to workers, and the FFCRA allows for tax credits, in both instances, if certain conditions are met. Accordingly, both contractors and their counsel benefit from remaining aware of the ever-changing requirements and guidance addressing each of these authorities.

Because while the Pernix decision reminds contractors to be aware of the risks that they face when they act without any government direction, at least some of those dealing with the effects of the COVID-19 pandemic may still be able to recover the costs that they incur in doing so.

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G. Scott Walters is a partner and Alexander Gorelik is an associate at Smith Currie & Hancock LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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