Help, My Business Is Underwater

November 6, 2018

By: John Ford, Senior Consultant

We have all seen news clips and heard reports of the flooding and devastation caused recently by Hurricanes Florence and Michael. Undoubtedly, contractors will be among those affected by these disasters. This is a good time to remind contractors of the contractual effects these events may have.

There are two obvious effects such disasters can have on contract performance – a schedule impact and a cost impact. Looking at the schedule impact, there are several clauses that may come into play. In this regard, we all know that failure to deliver or perform on time or to make satisfactory progress is a basis for the government to issue a default termination. However, under the concept of an excusable delay, a contractor cannot be terminated for default if its failure to perform is due to an excusable delay. Thus, we need to understand what an excusable delay is.

There are three standard Federal Acquisition Regulation (“FAR”) clauses that address excusable delays: FAR 52.249-8, Fixed-Price (Supply and Service); FAR 52.249-10, Default (Fixed-Price Construction); and FAR 52.249-15, Excusable Delays, which is used in cost reimbursement and T&M/LH contracts. Both FAR 52.249-8 and FAR 52.249-14 excuse a failure to perform “if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor.” FAR 52.249-10 has essentially the same language, except that this clause requires the non-performance to be due to an unforeseen event. This detail is significant because the appeals boards and courts have imposed the requirement that an event must be unforeseen on contracts for supplies or services. Moreover, if an event is foreseeable at the time of contracting, the contractor is expected to take measures to avoid the event. If avoiding the event is not possible, the contractor must take steps to mitigate the impact of the event.

In addition to providing the definition of an excusable delay, each clause lists examples of events that may constitute an excusable delay. Among those events are floods and unusually severe weather. Note that the mere occurrence of one or more of the listed events does not automatically entitle a contractor to an excusable delay. Instead, the contractor still has to show that the event was unforeseen and that the delay was caused by events beyond the control and without the fault or neglect of the contractor.

Obviously, these requirements impose hurdles on contractors seeking to assert an excusable delay in regard to Hurricanes Florence and Michael. First, it will be difficult for contractors to show that hurricanes are not foreseeable during the peak of hurricane season. Next, expect flooding after a hurricane. This is particularly true after our experience with Hurricane Matthew in 2016. Next, to receive the benefits of an excusable delay, a contractor will have to show that Florence and/or Michael were unusually severe. If a contractor is able to establish that it did experience an excusable delay based on the foregoing criteria, the remedy is for the contractor to get a schedule extension to reflect the number of days contract performance was actually delayed by an excusable event.

Finally, we have to recognize that subcontractors can experience delays that impact prime contractors. Each excusable delay clause addresses this issue. However, in the interest of space, we will not discuss subcontractor delays and their impact on a prime contractor having an excusable delay.

The other clauses that relate to delayed performance are FAR 52.242-15, Stop-Work Order, which is used in supply and service contracts, and FAR 52.242-17, Government Delay of Work, which is used in fixed-price supply contracts but may also be used in fixed-price service contracts. These clauses, along with FAR 52.242-14, Suspension of Work, which is used in fixed-price construction contracts, are referred to as the compensable delay clauses. For this article, we will concentrate on FAR 52.242-15, Stop-Work Order.

Under FAR 52.242-15, the government can direct the contractor to stop work for up to 90 days. This period can be extended by the mutual agreement of the parties. At the end of the stop work period, the contractor is entitled to an equitable adjustment which includes a schedule adjustment if the time for performance of the contract was impacted by the stop work order. Similarly, under 52.242-17, a contractor is entitled to a schedule adjustment if the government constructively delays the contractor in performing the contract.

As for the cost impact of events such as Florence and Michael, none of the excusable delay clauses allow for a cost or price adjustment. Thus, other clauses need to be examined to determine if the contractor is entitled to a cost adjustment. We mentioned the compensable delays clauses above. Under 52.242-14 and 52.242-17, the contractor is entitled to a price adjustment based on the cost impact of the government delay. However, this adjustment excludes profit. On the other hand, the equitable adjustment to which the contractor is entitled under 52.242-15 includes the cost impact of the stop-work order plus profit.

If a contractor holds a fixed-price contract and relief under one of the compensable delays clauses is not available, the contractor is responsible for the cost impact of events such as Florence and Michael. This can be particularly harmful if the contractor has a fixed price incentive contract where its profit may be decreased through no fault of the contractor.

On the other hand, if a contractor holds a cost reimbursement contract, the contractor can be reimbursed for additional costs if it complies with FAR 52.232-20, Limitation of Costs, or 52.232-22, Limitation of Funds, whichever is appropriate. However, note that these clauses only allow for the recovery of costs to cover a cost overrun. They do not allow for an adjustment to fee.  This is particularly problematic for a contractor with a cost plus incentive fee contract where the contractor’s fee can be reduced because of the increased costs caused by an excusable delay.

Finally, under a T&M/LH contract, FAR 52.232-7 allows a contractor to cease work once it reaches the ceiling price of the contract. If the government wishes the contractor to continue work, the government will have to add additional funds to the contract. If the government does add more funds and increase the ceiling price of the contract, the contractor is entitled to bill the government for each hour expended in contract performance at the full hourly rate set forth in the contract. Thus, in this case, the contractor continues to receive profit on the increased effort.

As this discussion shows, there are complicated issues involved in determining the contractual implications of delays and increased costs caused by events such as Florence and Michael. If you are a contractor affected by these disasters, do not hesitate to contact Cherry Bekaert for possible assistance in dealing with the government on these or other issues.