CHAPTER
23
CHANGES
The changes clause is a clause that only an organization with the clout of the federal government could exact from contractors. You will not find a clause like the changes clause in the typical agreement between two private, nongovernment parties. When two people get together and agree to contract for some work, the parties agree that the work—for example, painting the outside of a house—will be done by one party and money—say $3,000—will be paid by the other party in exchange for the painting. That’s the deal. Neither party can force the other party to change the deal. Of course, the parties can agree to change the original deal. But neither party can force the other to make a change to the contract.
The government is different. In a government contract, the government and the contractor agree that the government can force the contractor to agree to a change in the deal to which the parties previously had agreed.
What are the limits of the government’s use of the changes clause?
There are limits, of course, on how far the government can go with changes under the clause. The clause itself puts two significant limits on the government freely using the changes clause to do whatever it wants to do. The first limitation is that any change can only be “within the general scope” of the original deal. The second limitation is that these scope changes can be made to only a limited number of areas of the contract. So some changes are off-limits to the government under the changes clause.
It’s important to understand how the changes clause works. For the purposes of this book, we’ll use the standard changes clause, FAR 52.243-4. The changes clause for other types of contracts, such as architect-engineer, services, supplies, and so forth, are all minor variations on this clause:
(A) The Contracting Officer may at any time, by written order, and without notice to the sureties, if any, make changes within the general scope of this contract
GAO has several tests for determining whether a modification of a contract is beyond this scope. One GAO test for beyond-scope modifications looks at “whether there is a material difference between the modified contract and the contract that was originally awarded. Evidence of a material difference between the modification and the original contract is found by examining any changes in the type of work, performance period, and costs between the contract as awarded and as modified.”
For example, an indefinite-delivery/indefinite-quantity (IDIQ) contract to engineer, furnish, and install systems and equipment had a modification that added a senior network project engineer and a network project engineer who had to be certified as Microsoft Certified Systems Engineers. GAO found that the modification, and thus the delivery order, were within the scope of the original contract. The original contract had software installation and integration work. Moreover, the added personnel had job descriptions that were similar to or identical with the job descriptions in the original contract.
But, housekeeping services are beyond the scope of a preventive maintenance contract. The solicitation and contract required “facility maintenance repair, such as HVAC mechanic, boiler operator, plumber/pipefitter, general maintenance mechanic, electrician, painter, carpenter, electronic technician, welder and kitchen equipment mechanic.” Housekeeping was not within the scope of this solicitation and contract. In this case, GAO also looked at “various letters and memorandum from agency officials regarding the intent and purpose of the original contract [which] also support our conclusion.” This included the memorandum of agreement between the agencies using the contract, which addressed “scheduled or predictive maintenance” and “repairs to real property.”
Requirements contracts are different. Large increases in items under a requirements contract will generally not be beyond scope. So long as an agency has good faith business reasons for doing so, it may order any quantity of goods under a requirements contract without going beyond the scope of the contract. Thus, it is very difficult to go beyond the scope of a requirements contract.
The only limit is the good faith of the government. A good faith business reason justifies greatly underbuying or greatly overbuying items under a requirements contract. One board referred to a requirements contract as “a virtually open-ended agreement pursuant to which the federal buyer may place orders in any quantity, no matter how far removed from the contract estimate, so long as the agency’s action reflects good faith business reasons. Such orders, by definition, must be regarded as within the scope of the contract as originally awarded.” There can be no bad faith if the agency has a legitimate need to overbuy or underbuy items from a requirements contract.
How are ripple effect costs paid for?
One of the most convoluted sentences in the entire FAR is found in the changes clause:
(B) If any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, the Contracting Officer shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract.
What were the drafters of the clause trying to say? The drafters were trying to account for “impact costs.” Here’s the problem. When the government makes a change, it normally causes an increase or decrease in the cost of, or the time required for, the work that is getting changed. That’s obvious.
What may not be so obvious is that the changed work can make the unchanged work more or less costly, or more or less time-consuming. In other words, changes affect not only changed work; changes can affect the cost of or time required for the performance of work that will not be changed.
For example, the government has a contract with a construction company to build a road onto the building site and then construct the building at the end of the road that was just built. As the road is being built, the direction of the road has to be changed because a Native American burial site is discovered in the planned path of the road. To get around the burial grounds, the road must be moved, doubling or tripling the cost of the road. Naturally, the government would modify the contract to increase the cost of and the time required for constructing the longer road.
However, there’s no change whatever to the building to be constructed at the end of this road. Although there is no change in the building itself, the cost of constructing the building and the time to build it certainly change because travel costs over the road, which is now two or three times longer than anticipated, will inevitably drive up transportation costs of materials and increase the cost of and time required for construction of the building even though technically the building was unchanged by the order.
What this poorly worded FAR sentence is trying to say is that changes have ripple effects. A change not only affects the cost of the actual work being changed, but can also change the cost of unchanged work. And the changes clause allows the contracting officer (CO) to pay a contractor for the impact that any change has on unchanged but more costly or more time-consuming work.
What are the time limits for a contractor submitting requests for equitable adjustments due to changes under the changes clause?
The language of the clause is much worse than the reality of it:
(C) The Contractor must assert its right to an adjustment under this clause within 30 days from the date of receipt of the written order. However, if the Contracting Officer decides that the facts justify it, the Contracting Officer may receive and act upon a proposal submitted before final payment of the contract.
The clause seems to demand submission of equitable adjustment within 30 days. But that’s not the way the courts and boards have interpreted it. The contractor must assert its “right” to an equitable adjustment within this period of time. So there certainly is no need under the clause to submit a formal proposal for equitable adjustment within the 30-day deadline.
What the clause seeks is notice to the government within 30 days. Regarding the apparent 30-day deadline, the courts and boards have interpreted the “deadline” to be not an absolute bar to filing a notice or a request for equitable adjustment. What the courts and boards look for is whether a contractor’s failure to follow the 30-day deadline has in any way harmed the government. In legal terminology, the courts and boards look for “prejudice.” And even when they find some type of harm to the government as a result of a contractor missing the 30-day deadline, the courts and boards typically do not forbid the contractor from filing the notice or request for equitable adjustment. What they do is increase the contractor’s “burden of persuasion” in proving the claim.
As a practical matter, the only real deadline is that the notice or request for equitable adjustment must be received before final payment. As described in Chapter 20, the phrase “final payment” is a term of art. It has special meaning in government contracts. Simply because no more payments might be due under the contract is no reason to assume that final payment has been made and that there’s no time left to submit a request for equitable adjustment under the changes clause.
Does the contractor have to carry out the change while fighting about it with the government?
Typically, contractors do have to carry out the change while the change is in dispute. Here’s the language of the clause:
(e) Failure to agree to any adjustment shall be a dispute under the Disputes clause. However, nothing in this clause shall excuse the Contractor from proceeding with the contract as changed.
The clause clearly makes any controversy over the amount of compensation for the change subject to the disputes clause. And it would seem from the second sentence that a contractor, under all circumstances, must keep working on the contract while the dispute over the adjustment lasts. But notice the language that’s used. The clause says that “nothing in this clause” excuses a contractor from keeping on the job while the fight over the money goes on.
But there is another clause that may excuse the contractor from proceeding with the work. That’s the disputes clause itself, which does not require a contractor to proceed with work if the dispute involves an issue that “relates to” the contract.
This “duty to proceed” is tricky. As long as the work called for by a change under the changes clause is not beyond the scope of the contract, a contractor must proceed with the work. Contractors do not have the legal luxury of stopping work to litigate. One big exception is for work beyond the scope of a contract.
For example, a company with a contract to “demilitarize” bombs was told to double the number. It turned out that the number was not doubled, but only increased by about 20 percent. But in any event, the increase in the number of bombs was not the critical issue. What was critical was whether the amount of 3000 bombs, as demanded by the CO, was beyond the scope of the contract. The Court of Appeals for the Federal Circuit concluded that it was not. The main reason was that the total number of bombs to be demilitarized over the course of the contract was not changed. “If the contracting officer had required a significant change in the total number of bombs that Alliant was required to process, the contracting officer’s directive might have been construed as a drastic modification in the terms of the option….” Moreover, Alliant could not prove that production for a higher rate over a shorter time “would be more costly than lower production for a longer period.” Alliant was not forced to make a beyond-scope change and therefore had the obligation to proceed with the work (Alliant Techsystems, Inc. et al. v. United States, U.S. Court of Appeals for the Federal Circuit No. 98-5016, 98-5044, May 28, 1999).
If a contractor is forced to agree to a modification under the changes clause, is the modification valid?
Duress forcing a contractor to sign a modification nullifies the modification. Here’s the rationale. A contract must be a voluntary meeting of the minds. As a result, an agreement that is coerced is voidable by the party being coerced. Duress can void contractual obligations if there is proof that one party involuntarily accepted the terms of the other, circumstances permitted no other reasonable alternative, and the circumstances were the result of coercive acts of the other party.
This is, however, very difficult to prove. Often, “duress” to a contractor is simply the fact that the contractor has to accept a bargain that it does not like. It’s not that it’s forced on it by the government.
Moreover, a contractor must raise the duress issue soon. It cannot wait several years before raising it. A four-year delay in claiming duress is too long. Duress must be alleged within a reasonable period of time.
Can anyone other than the CO bind the government?
Only someone with authority to legally bind the government can in fact bind the government. The rationale for this principle is that strict control over taxpayers’ money is critical. And the best way to maintain this strict control is to allow only those authorized, such as COs, to bind the government (i.e., to be able to legally commit taxpayers’ money).
Exceptions to this principle fill volumes. Like any legal principle, there are exceptions that develop to ensure fairness. Over the years, a number of exceptions have been developed to make sure that the principle is not so rigidly applied that injustice results.
What is imputed authority?
One exception is imputed authority. The heart of the imputed authority principle is that the CO’s representative or technical representative is the CO’s eyes and ears. That being the assumption, it’s fair to hold the contracting officer responsible for what the CO’s representative does because it is assumed that the CO’s representative does the job assigned: reporting information to the CO and being the CO’s spokesperson.
For example, a company continued to work for the government during an option year even though the option had never been executed by the government. In fact, neither side had signed the option. There was no dispute that the contractor actually did work for the government during the option year. The government refused to pay for the company’s services because there was no signed contract. The Armed Services Board of Contract Appeals found that an implied-in-fact contract existed based on the CO’s representative’s involvement.
What is apparent authority?
There is an exception that the government does not have. Although the private market has an exception to the authority principle—apparent authority—the government does not. Apparent authority is authority that does not exist in fact, but only in appearance—it’s authority that seems to exist with the knowledge and assistance of the principal. In simple terms, if a principal allows someone to appear to be the representative of that principal, the “agent” can in fact be treated as an agent even though it is not. For example, a McDonald’s changes over to a Wendy’s on April 1. McDonald’s must strip the location of all its logos on March 31 because if the facility opens April 1 as a Wendy’s, but it appears to be a McDonald’s, McDonald’s could be sued for a rotten hamburger sold by the facility, even though the restaurant is legally a Wendy’s. Because McDonald’s allowed the facility to represent itself as a McDonald’s, McDonald’s can be held legally liable.
Apparent authority does not exist in government contracts. For example, a government supervisor could allow someone with no authority to use the office of someone with authority. If a company comes into the office, sees an unlimited warrant on the wall, assumes that the warrant belongs to the person using the office, and signs a contract with that person with no authority, the company cannot enforce the contract. If the government employee without authority were to attempt to commit the government legally, the government could disavow the employee’s unauthorized acts.