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Disputes on Construction Projects with Federal Agencies Contractors Aren’t Always at Fault

Contractors are frequently blamed for cost overruns and chronic delays on federal projects because they lack significant information technology integration, adequately skilled workers, and effective coordination between subcontractors.

However, CFMA and the Sage Policy group analyzed 107 cases and found out the fault is not always the contractors’. For the report, Analysis of Construction Projects with Federal Agencies and the Cause of Disputes, CFMA and Sage examined the extent to which courts attribute fault to contractors as opposed to government agencies when disputes arise and are adjudicated. Although most disputes are settled out of court, when a project ends up being adjudicated, it is worth knowing how often claims against contractors prove valid and more importantly glean insight into what contractors could have done differently to avoid conflict.

For almost 50 years, the federal government has had mechanisms to resolve disputes. Special courts have been established to handle disputes involving agencies and contractors. These courts, although similar to courts that handle traditional civil and criminal trials, have certain unique features. First, respondents and appellants replace plaintiffs and defendants. Second, rather than a judge and a jury of one’s peers determining outcomes, an administrative panel determines the relative merits of arguments.

Key Findings

In 53 of 107 cases, contractors were partially vindicated although the cases were decided in favor of government agencies. Contractors who claimed that the public agency or purchaser of services was at least partially responsible for cost overruns and/or delays were able to present a persuasive case. Based on the study team’s findings, in roughly 16 percent of cases, all negative or disappointing project outcomes were effectively attributed to the public agency.

In those instances in which the public agency prevailed outright, the average contract amount exceeded $18.3 million. By contrast, in cases that the contractor won outright, the average contract amount was $6.3 million. In split decisions favoring agencies, the average original contract award was $16.2 million. In split decisions favoring contractors, the average original contract amount averages $11.7 million. On average, damages sought equaled just 6.9 percent of the original contract amount.

Fig. 1 CFMA Report

In disputes involving the Army Corps of Engineers, contractors prevailed only 11 percent of the time and partially recovered in just 38 percent of instances. Of the agencies included in the analysis, the General Services Administration (GSA) was least likely to prevail. In cases involving the GSA, contractors totally prevailed 38 percent of the time and received at least partial satisfaction in nine out of 13 cases.

In the 14 cases involving infrastructure projects, the contractor completely prevailed only once and partially prevailed on only two other occasions. It is not clear whether this is due to the nature of infrastructure project-related disputes or because these projects are often governed by the Army Corps of Engineers.

Among the 25 cases that involved design-build construction service delivery, the contractor prevailed at least partially 32 percent of the time. Among the 74 design-bid-build projects in the database, the contractor prevailed at least partially 45 percent of the time.

This is surprising since disputes often arise when there is a lack of communication between the parties. Design-build involves significant upfront communication to plan projects and to reach consensus on specifications and other key issues. However, in the vast majority of cases, the cause of the dispute arises during the project and is typically unforeseen by either party. Correspondingly, upfront engagement between the parties represents an imperfect defense against the emergence of disputes.

Many of the disputes center upon misunderstandings regarding specifications. To the extent that agencies are deemed to be at fault, the reason often involved a change in specifications that was not properly communicated or that required some level of countervailing financial consideration that is not offered.

By far, the most common cause for disputes was the denial of a cost adjustment due to an unforeseen problem or issue that arose over the course of the project. Again, with many disputes arising during the course of performance, design-build possessed little advantage over design-bid-build in terms of preempting legal disagreements.

The frequency of lawsuits seems to increase in a recessionary economic environment. One might expect that people would battle most intensely for resources during those moments in economic history when resources are most scarce. Correspondingly, 18 of the 107 cases were decided in 2001. Ten of the cases took place in 2008, a year fully engulfed by the Great Recession. No other year produced nearly as many cases in the collection. Given the federal budget’s financial situation, however, it is conceivable that disputes will become more frequent between agencies and contractors going forward irrespective of the state of the economy.

Contractors’ claims were most likely to be denied due to a lack of evidence. When contractors work with government agencies, persistent documentation is essential. Many construction firms lose their appeals because of a lack of adequate evidence regarding the basis of their claims or defenses.

One of the primary goals of the research was to identify circumstances that are less closely associated with poor project outcomes and lawsuits. To the extent that certain project delivery methods are associated with better outcomes, those delivery methods should be more broadly adopted. It may also be that certain types of projects (e.g. infrastructure) are more frequently associated with lawsuits, and that these projects may need to:

  • be more tightly managed by project owners;
  • move away from simple low bid winner formats; and
  • require more upfront collaboration and planning.

Underlying Causes of Disputes

Fig 2 CFMA Report

The most common cause for dispute is the denial of a cost adjustment due to an unforeseen problem or issue that arises over the course of the project. Of the 107 cases in the database, 63 involved claims for equitable adjustments. The most common of the adjustment-related disputes concern delays. Appellants in many of these cases placed blame squarely on agency managers due to excessive waits for approval of critical purchases, including equipment. Weather also represented a major source of delays, disagreements and discontent.

The full report, Analysis of Construction Projects with Federal Agencies and the Cause of Disputes, was prepared in September 2015 and includes sections on court procedures, case selection, analysis of outcomes with accompanying charts, underlying causes of dispute and case studies.

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