On December 9, 2014, a three-member panel of the Civilian Board of Contract Appeals ("CBCA") ruled that Kiewit-Turner, a Joint Venture ("KT"), could rightfully stop work on the Aurora VA hospital project. Kiewit-Turner, a Joint Venture v. Dept. of Veterans Affairs, CBCA 3450. When KT notified the Department of Veterans Affairs ("VA") that it would indeed stop work, the media picked up the story, but the headlines mostly focused on the contractor's decision to stop work. This article explores the CBCA's ruling and what it says about a contractor's right to stop work when the projected cost of the work greatly exceeds the contract price.
The contract that the VA awarded to KT was phased. The scope of work included certain pre-construction services, and also included an option for actual construction services. The idea behind having the contractor provide pre-construction services was to bring the contractor into the project early and provide input and advice during the design phase. The CBCA identified the model as an "integrated design construct" or "IDc" contract. And according to the CBCA, the VA had never used this type of contracting before.
The VA's construction manager, Jacobs Engineering Group, Inc. ("Jacobs"), served as the VA's construction manager, and the VA's design team was a joint venture team that consisted of Skidmore Owings & Merrill, S.A. Miro, Cator Ruma, and H+L Architects (the "JVT").
The VA awarded KT its contract on August 31, 2010. By that time, the project was already in the design development phase and funding decisions had already been made. As such, the VA was not in a position to make modifications based on KT's pre-construction services. Basically, the design was already too far along for KT's pre-construction services to truly integrate with the design.
KT still performed the pre-construction services, and advised the VA that the design was over the VA's estimate of $582,840,000 and that value engineering was not being incorporated into the design.
Once the design was 65% complete, KT submitted a proposal for completing the project at $609,000,000. Because the design was incomplete, KT's proposal included certain assumptions, and assumed that the VA would ensure that the design included $23 million of value engineer items. At the same time, Jacobs estimated that the cost of construction based on the current design at $677,697,408.
After an impasse about the price and the assumptions and conditions in KT's proposal, the parties "mediated" and agreed, in writing, inter alia, that the VA would cause the JVT to produce a design that meets the VA's estimate of $582,840,000, plus pre-construction services and off-site infrastructure work, bringing the total to $604 million. Because the current design would not have met this criteria, this new agreement contemplated that a future design would be created to meet the estimate.
Problems with the design persisted, and the relationship between the parties was made worse by the VA's failure to timely pay KT. The JVT did not value engineer the design to fit within the required estimate, and the projected cost of the design far exceeded the ECCA. Nevertheless, the VA directed KT to proceed with construction as designed, while at the same time directing the JVT to redesign the project to meet the VA's required estimate. KT objected, but the VA responded that it would hold KT to the ceiling estimate price.
KT engaged in significant value engineering efforts, but, according to the CBCA, the VA rejected most of KT's value engineering proposals, and the JVT refused to incorporate others into the design. The VA ultimately decided not to change the design and did not have enough money appropriated for the project to cover the projected costs of construction.
Faced with spending its own money on the project, on April 30, 2013, KT requested a decision from the VA contracting officer as to whether the VA breached the contract by failing to provide a design that could be built for the ECCA, and whether KT could therefore stop work on the project. On June 26, 2013, the contracting officer issued a decision denying that the VA had breached, and directing KT to proceed with the work.
On July 8, 2013, KT filed an appeal with the CBCA. The VA first filed a motion to dismiss, arguing that KT did not have a right to declaratory relief. The VA argued that the dispute was really about money, and that KT could seek to recoup additional compensation via the changes clause in the contract. The CBCA found that such a remedy would be inadequate, and denied the motion to dismiss.
After an eight-day hearing, the CBCA ruled in favor of KT on all issues. Specifically, the CBCA ruled that: (1) the VA was contractually obligated to provide a design for the project that could be built for $582,840,000; (2) the VA materially breached the contract by failing to provide a design that could be built for that amount; and (3) KT, as a result of the breach, was entitled to stop work on the project. The CBCA noted that the VA had decided not to redesign the project and had not sought additional funding for the project. Also, although KT had continued performing work during the dispute, it did so clearly under protest.
This case provides a unique situation where the project owner essentially guaranteed that the project would be redesigned so that it could be built for under a certain amount. No detail was included as to who decides whether or not the design would meet that criteria. But according to the CBCA, regardless of whose estimate it used, the figures all significantly exceeded the VA's target amount of $582,840,000.