INTRODUCTION
Contract Changes that are directed via Government modification often mean more work and more money for the contractor. However, contractors should consider a number of factors before performing work under a unilateral modification. For example: Do I have to perform the unilaterally directed work? Is the modification funded? Is the “maximum price” listed in the modification binding? Am I bound by release language in the unilateral modification?
The answers to these questions are discussed below, including the Civilian Board of Contract Appeals (Board) recent holding that release language in a “unilateral modification” was not enforceable, even though signed by the contractor.
BILATERAL vs. UNILATERAL MODIFICATIONS
As a fundamental review, the purpose of a contract modification is to modify in writing a contract’s terms or conditions, such as its statement of work, period of performance, quantity, or price.
There are two types of contract modifications: unilateral and bilateral.
Unilateral modifications are signed only by a contracting officer and are generally used to make administrative changes, issue change orders, make changes authorized by clauses other than the Changes clause, and issue termination notices.
Bilateral modifications (supplemental agreements) are signed by both the contracting officer and the contractor. Bilateral modifications can add new work or revise existing terms, and it most often involves cost implications either upward or downward.
The Government’s policy on determining modification pricing is found in FAR 43.102(b), which mandates that contract modifications “shall be priced before execution,” and if a negotiated price cannot be agreed upon in the timeframe available, “at least a maximum price shall be negotiated,” unless impractical.
Historically, the price of the Change cannot be agreed upon either because of an urgent need to perform Changed work in order to keep the project on schedule, or because the parties simply cannot agree as to the cost of the additional work.
Accordingly, some agencies have attempted to establish a “maximum price” by including it in a unilateral modification. This raises the question of whether the maximum price is binding, given that the contractor did not sign the modification. Some agencies have also attempted to include “release” language, whereby the “maximum price” would be complete compensation for all costs, direct and indirect, associated with the additional work.
As discussed in the Hamilton case below, this type of release has been found to be non-binding when issued in a unilateral modification.
RELEASE LANGUAGE AND UNILATERAL MODIFICATIONS
The question often arises: Can the Government include release language in a unilateral modification, setting a maximum price on all direct and indirect Change work, including delay, disruption and/or ripple effect?
In a word: No. The Civilian Board of Contract Appeals recently held that release language in a “unilateral modification” was not enforceable, even though signed by the contractor. Hamilton Pacific Chamberlain, LLC v. Department of Veterans Affairs, CBCA 4958 (February 2016).
In Hamilton, the Department of Veterans Affairs (VA) awarded a contract to Hamilton Pacific Chamberlain, LLC (Hamilton) for renovations in two buildings at the VA Medical Center in West Virginia. The VA ordered extra work, but the parties could not agree on the pricing. The VA ultimately issued a modification it identified as unilateral, although the modification included a signature line for Hamilton’s Vice-President (which was indeed signed by the VP). The modification also included the following release language, on the second page:
The consideration represents a complete equitable adjustment for all costs, direct and indirect, associated with the work and time agreed to herein, including but not limited to all costs incurred for extended overhead, supervision, disruption or suspension of work, labor inefficiencies, and this change’s impact on unchanged work. [emphasis added]
The Government claimed that this release language absolved it from paying the additional costs claimed by Hamilton that were incurred in performance of the Changed work, which costs rose above the maximum price listed in the modification.
Hamilton argued that it did not intend to waive or release any of its rights to payment by signing the unilateral modification, but claimed that it only signed the modification because the VP thought that the Government required it (otherwise, it would not have included the signature block on the modification).
The Board agreed with Hamilton, finding that the nature of a unilateral modification contradicts the idea that both parties intended it to represent a complete resolution of all claims regarding the additional work. The Board found that the evidence was unclear as to whether Hamilton intended to waive its rights to future claims, in spite of the release language and signature. Therefore, the release language did not preclude Hamilton from recovery of its incurred costs above the maximum price listed in the modification.
Having determined that the “maximum price” listed in the modification was not binding, the Board went on to reason that Hamilton’s records of actual costs incurred in performance of the work trumped the VA’s cost estimate prepared prior to performance, and awarded Hamilton’s actual costs. This highlights the importance of keeping good cost records throughout the project, as Courts and Boards favor the use of actual costs for contract modifications when work has been completed. Therefore, the more detailed cost records a contractor presents, the better its chances of recovery when the claimed amount is different from the Government’s estimated cost.
OTHER CONSIDERATIONS
Should you sign a unilateral modification? No, not ever!!
Although the courts and boards have found that a signature does not necessarily turn a unilateral mod into a bilateral modification, the facts surrounding each project are different, and a contractor can avoid the possibility of a bilateral issue by simply not signing the unilateral modification. A unilateral modification, by its nature, does not require a signature.
However, the contractor should perform the work described in the unilateral modification (except in extreme cases, such as material breach). Unjustified Failure to perform the work can result in dire consequences, as contractors could potentially face breach of contract, claims, a Default Termination, or the associated liabilities to include reprocurement costs.
However, some contractors may fear that performing the work when it disagrees with the terms in the modification may signify that the contactor agrees to the terms and conditions, effectuating an “accord and satisfaction” to the Government’s unilateral terms. While this is generally not the case, contractors should take extra precautionary measures to protect themselves in this regard, in writing, by promptly objecting to the release language and maximum price, and reserving its future rights.
A simple notification to the Government that the contactor does not agree with the terms (whether or not the contractor defines what agreeable terms would be) will make it clear that the Change work is being performed under protest.
A similar notification will protect the contactor’s rights against a maximum price ceiling for the Changed work by notifying the Government that it does not agree with the Government’s estimated price, and that it reserves the right to submit an Equitable Adjustment to recover any costs incurred above and beyond the modification maximum price. See Utley-James, Inc., GSBCA 5370, 85-1 BCA ¶ 17,816, aff’d, 14 Cl. Ct. 804 (1988).
Alternatively, the contractor may agree to the direct costs of a modification, while inserting language into the modification reserving its right to negotiate any related delay or impact costs that arise therefrom. The Boards have preserved these rights even where a contracting officer crossed out the contractor’s proposed reservation of rights language when issuing the changes. See John Cibinic Jr., Ralph C. Nash Jr. & James F. Nagle, Administration of Government Contracts (4th ed., 2006).
CONCLUSION
Again, a unilateral modification should be treated as just that by the Contractor – a one sided Change. A unilateral modification does not require a contractor signature or assent in any way. Do not sign unilateral modifications.
If the contractor does not agree to terms of a unilateral modification, the contractor should still perform work (except in rare cases, as mentioned above), but perform the work under protest, reserving its rights to recovery of all its costs.
If the Government issues a unilateral modification that raises a concern, contractors should contact a consultant to help determine the best course of action, while protecting its rights and its bottom-line.
Note: Excell Consulting has helped clients navigate these issues four times in the last four months, one of which involved put $1 million at issue.
In the end, you will be glad you made the call; by the way, it’s a FREE CALL.
Excell CONSULTING: “Here Today for Your Tomorrow.”
Author’s note: The information contained in this article is for general informational purposes only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation. – Taylor Benson, Esq., Assistant General Counsel
For a printable pdf copy of this report click here.