Government Contracts Constructive Change Entitled Contractor to Recover Increased Costs
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Monday, August 17, 2020

Constructive Change Entitled Contractor to Recover Increased Costs

By Government Contracts Editorial Staff

According to the Armed Services Board of Contract Appeals, a contractor was entitled to recover for performing additional work because, based on the parties’ course of dealing, the government constructively changed contract requirements, which increased the contractor’s costs. The appeals involved a series of three annual contracts to produce and deliver advanced medium-range air-to-air missiles. The parties disputed the requirements of two paragraphs in the contracts’ statements of content. The government argued the first paragraph, which covered missile production and had a three-year period of performance, applied and required the contractor to provide production systems engineering/program management for each three-year period. The contractor asserted the second paragraph, which covered SEPM and had a one-year period of performance, applied and required the contractor to provide production SEPM for only one year. To establish a constructive change, a contractor must show there was a change to performance requirements and the contractor did not volunteer to perform additional work, but was directed by an authorized government officer to do so (04-1 BCA ¶32,569). The board first determined that the contracts were ambiguous as to which paragraph covered production SEPM. It was reasonable to interpret the first paragraph as covering production SEPM because that paragraph covered “all the activities necessary to produce” the missiles. It was also reasonable to interpret the second paragraph as covering production SEPM for only one year.

Course of Dealing. Despite the ambiguity, the parties’ prior course of dealing established the existence of a change based on a common understanding that the second paragraph covered production SEPM and required the contractor to provide production SEPM for only one year. The government’s program manager and requirements manager repeatedly expressed an understanding, based on the parties’ course of conduct, that the second paragraph covered production SEPM. Other government employees involved in the program also verified the government understood the second paragraph to include production SEPM. Thus, the government constructively changed the contracts when COs incorrectly interpreted the first paragraph as covering production SEPM and directed the contractor to provide production SEPM during the three-year performance period. As a result, the contractor was entitled to an equitable adjustment for the increased costs of performance it incurred due to the constructive change. As to quantum, the contractor established with reasonable certainty the actual costs it incurred as a result of the constructive change. The contractor also established entitlement to a reasonable profit. (Raytheon Co., ASBCA, ¶96,070)

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