A recent Virginia case strictly construing a statutory limit on the amount of contract change orders has raised concerns among contractors doing business with Virginia state and local agencies. In Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, 745 F.3d 703 (4th Cir. 2014), the Fourth Circuit Court of Appeals held that a construction contractor’s claim for extra work performed at the request of a local housing authority must be cut by the amount it exceeded 125 percent of the base contract price because the governing body of the housing authority had not approved the changed work in advance, as required by statute.
The statue in question, § 2.2-4309 of the Virginia Public Procurement Act (VPPA), limits the scope of changed work under fixed price contracts as follows:
§ 2.2-4309. Modification of the contract. A. A public contract may include provisions for modification of the contract during performance, but no fixed-price contract may be increased by more than twenty-five percent of the amount of the contract or $50,000, whichever is greater, without the advance written approval of the Governor or his designee, in the case of state agencies, or the governing body, in the case of political subdivisions.
The Virginia statute is not unique. Section 13-218(e) of the Maryland State Finance and Procurement Code, for example, prohibits a state agency from proceeding with changed work on a construction project unless it gets prior written approval from the state unit and certification from the fiscal authority as to the availability of money and the effect of the contract modification on the project budget. Similarly, in the federal system, while the standard "Changes" clause (Federal Acquisition Regulation 52.243-1) does not contain a dollar limit, a contracting officer may not exceed the dollar limits of his or her warrant and likewise may not issue change orders in excess of available contract funding. Contractors usually consider these restrictions as applicable only to the internal operation of the government agency, however, and only rarely are they applied to limit contractor claims in a court or board of contract appeals.
In the Carnell case, the contractor and the housing authority got into a dispute over performance of a $793,541 fixed price construction contract. The contractor brought suit and a jury returned a verdict for the contractor for extra work in the amount of $515,000. After trial, the court applied Va. Code § 2.2-4309 to reduce the verdict to $142,557.57, ruling that the governing body of the housing authority had not approved the extra work in advance.
The Fourth Circuit affirmed, rejecting the contractor’s arguments that it had performed the work for valuable consideration and that the restriction should not apply to claims asserted in litigation. The court said:
We conclude that on its face, the statutory cap plainly applies to all fixed-price public contracts and forbids an increase to any such contract that exceeds a proportion of the contract's price. A contrary conclusion would permit the absurd result of allowing Carnell to recover, through a lawsuit, an amount that Carnell could not lawfully have obtained through a mutually-agreed modification of the contract terms. Id., 745 F.3d at 723.
The Carnell case presents potentially huge problems for Virginia state and local contractors. While the statutory cap applies only to "fixed price" contracts (contracts awarded on a unit price or a cost-type basis are not covered), the contractor could find itself on the horns of a dilemma with respect to extra work directed by the government, particularly where the parties disagree about whether the work is included in the scope of the original contract.
The problem is that most Changes clauses require the contractor to proceed with the work as changed pending the negotiation of a change order or the resolution of a dispute. Even if both parties agree that the work is extra to the contract, the contractor is at risk that it might not get paid until or unless the Governor (in the case of the state) or the governing body of a local government entity specifically approves.
The situation is much worse if the change is "constructive" only and there is a dispute about whether the work is truly outside the scope of the contract. In that case, the contractor faces a risk of default if it refuses to perform, yet there is little chance that the governing body will approve the extra work in advance, since the parties do not even agree that the scope of the contract has been changed.
To avoid problems under Va. Code § 2.2-4309 and similar statutes, contractors should consider the following:
- Closely monitor the cumulative dollar value of change orders under the contract (the statute applies not just to single changes but to overall changes in contract price). Whenever total change orders approach 25% of the original contract price, request governing body ratification of all prior change orders, as well as advance approval of any pending change orders that may exceed the statutory cap.
- Try to avoid proceeding with significant work on change orders over the 25% threshold until the governing body has approved. Argue that the contracting officer or the owner’s representative does not have authority to direct the change and that Changes clause provisions requiring the contractor to proceed with changed work in advance of agreement on price do not apply to changes of that magnitude, absent governing body approval.
- With respect to constructive changes or disputes, try to present your claim directly to the governing body, before proceeding with the work. That way, even if the governing body supports the contracting officer, you can later argue that the governing body was aware both that the work had been ordered and that the contractor considered it to be outside the scope of the contract. This may permit the contractor to argue that it substantially complied with the statute, permitting eventual recovery.
- Depending upon the strength of your argument that the work is extra to the contract and depending upon the cost exposure to your company, consider refusing to perform the changed work until a change order is agreed upon and approved by the governing body. A decision to do this risks default, however, and should never be taken without the advice of competent counsel.