The United States Court of Federal Claims recently held that a contractor’s claim for additional compensation for a change should be denied because the contractor failed to satisfy its contract’s written notice requirements. K-Con Building Systems, Inc. v. The United States, 114 Fed. Cl. 595 (2014).
K-Con contracted with the United States Coast Guard to design and build a prefabricated structure at a Coast Guard station. The contract contained a standard FAR Changes clause requiring, among other things, that the contractor give written notice of a Contracting Officer’s directive that constitutes a change to the contract within 20 days of receiving any such directive; and then assert its right to an adjustment in the contract price or schedule within 30 days of submitting that 20-day notice.
The primary issue in K-Conn was whether certain of the Coast Guard’s comments on the 35% and 50% design submittals constituted changes to the contract entitling the contractor to a time extension. This was important because the contractor finished the project more than six months late and was facing significant liquidated damages.
The Coast Guard sent the contractor its 35% and 50% design-submittal review comments on April 13, 2004, and June 1, 2004, respectively. The contractor agreed to incorporate those comments into its design. Approximately 14 months later, on July 28, 2005, the contractor sent the Coast Guard a claim letter stating that a time extension was appropriate because of changes to the contract. Then, on December 15, 2006, the contractor sent a second claim letter in which it explained the basis of the alleged changes.
The issue before the Court of Federal Claims was whether the contractor had provided the Coast Guard with written notice in conformance with the changes clause. Given that the contractor agreed to incorporate the review comments and the length of time that had passed between the receipt of the review comments and submittal of the claim letters, the court found that the contractor had not complied with the notice provision. The court stated that, in order “[t]o recover on its claim that the Coast Guard ordered changes to the contract without providing any compensation for those changes, [the contractor] must show that it complied with the requirements of the contract’s changes clause.” Finding that the contractor had failed to do so, the court denied the claim.
Is K-Con Anomalous?
The crux of the court’s decision is the adequacy or inadequacy of K-Con’s notice to the government of circumstances giving rise to a constructive change. Such notice requirements are found in virtually all construction contracts. Strict notice requirements in construction contracts are often relaxed by courts based on the conduct of the parties. Such courts focus their analyses, for purposes of enforcement of the notice requirements, on principles of actual knowledge, prejudice, and waiver, to prevent a strict interpretation from defeating an equitable result.
Courts have opined that adopting a severe and narrow application of a contract’s notice requirements are out of tune with the language and purpose of the notice provisions and that notice provisions shall not be applied technically and illiberally where the government is aware of the operative facts. See Hoel-Steffen Constr. Co. v. United States, 456 F.2d 760, 767-68 (Ct. Cl. 1972). Given the liberal interpretation of such clauses, compliance is often determined by whether the notice given satisfies the purposes of the clause. Thus, if contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary fact-finding and decision-making, courts have often found that the government is not prejudiced by the contractor’s failure to strictly adhere to the notice requirements of the contract.
This liberalization is not limited to federal construction contracts. Similar principles have been applied in state and private construction contracts wherein the parties may modify or waive notice requirements by their course of conduct throughout the project. In Nat Harrison Associates, Inc. v. Gulf States Utilities Co., 491 F.2d 578 (5th Cir. 1974), the court opined that notwithstanding a strict notice requirement, consistent actions of both parties may be found to constitute a waiver, and the contractor may recover additional compensation despite noncompliance with the contract. The court posited several situations which may form the basis for waiver of written notice requirements, including: (1) when the extra work was necessary and had not been foreseen; (2) when the changes were of such magnitude that they could not be supposed to have been made without the knowledge of the owner; (3) when the owner was aware of the additional work and made no objection to it; and (4) when there was a subsequent verbal agreement authorizing the work.
In Nat Harrison, the contractor sought additional compensation for the additional manpower and equipment it was directed to use to maintain the original work schedule, despite owner-caused delays. The court found that the owner waived the notice requirement because it was aware of the additional work and made no objection to it; accordingly, the contractor was entitled to seek such additional compensation.
Many of the factual scenarios outlined in Nat Harrison constituting waiver are dependent upon the owner’s involvement in the project and the particular work for which the contractor seeks additional compensation. InRonald Adams Contractor, Inc. v. Miss. Transp. Comm’n, 777 So. 2d 649, 653-54 (Miss. 2000), the contractor sought additional compensation for work that it considered to be a site condition which materially differed from those indicated in the contract. It was undisputed that the contractor failed to comply with the written notice requirements of the contract upon discovery of the site condition. The court, however, allowed the contractor to pursue its claim for additional compensation because the owner had actual knowledge of the site condition and had already been investigating the condition; accordingly, the court opined that any such notice would have been useless.
The specific facts in K-Con influenced the court to conclude that the lack of timely notice by the contractor could not be excused or waived. For example, the contractor apparently agreed to incorporate the proposed changes into the design without objection, and later (much later) first gave notice of the claim. If the contractor had contemporaneously noted that it felt the proposals were changes to the design, the result might have been different. In dealing with claims and contract requirements, courts often look to the essence of the agreement’s procedures to see if the practical objective has been achieved. In K-Con, that was not the result.