Scope-Changing Directives and Cardinal Changes

February 29, 2016

Construction Law


Quite often, ambitious contractors sign contracts full of legalese without fully knowing the contract’s meaning or its ramifications.  Even experienced contractors may find themselves in uncharted territory when faced with owner-issued directives seemingly changing the scope of the contract.  Especially confounding are changes to the scope of work coupled with a contract containing a clause obligating the contractor to continue performance despite the existence of a dispute.

All too often, owners1 use these directives as a way to manipulate the unwitting contractor into performing work outside the contract’s scope and at the owner’s sole discretion for price.  A contractually outmatched contractor can find him or herself obligated to perform a directive without any sure promise of compensation.  Directives like this can be especially onerous for smaller contractors who may have difficulty sustaining their businesses during a protracted dispute.  These directives present a difficult dilemma: Either proceed and take the chance of not being fully compensated, or walk off the project and face the possibility of a breach of contract.

The courts and boards in federal contracting cases have provided some relief to contractors facing these scope-changing directives, recognizing that some changes are indeed so far afield as to completely change the nature of the bargain.  In such cases, the changes may breach the contract or create an entirely new contract.  The federal courts called these changes “cardinal” changes.  Many jurisdictions now recognize the cardinal change doctrine as a method to balance the inequities too often resulting from strict adherence to the terms of a contract.  And, Maryland courts have followed this trend, recognizing cardinal changes in both singular form and in aggregation.2

Unfortunately for contractors facing a possible cardinal change, there is no reliable method to make a contemporaneous determination of cardinality.3  The determination is instead made by a fact-finder analyzing the totality of the circumstances surrounding the change and attempting to avoid inequitable results.4  In Becho, the Federal Court of Claims gave the following guidance concerning cardinal change:

[W]hile there is no precise calculus for determining whether a cardinal change has occurred, the courts have considered, inter alia, the following factors: (i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to provide a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.  As should be evident, these subsidiary questions themselves are intensely factual[.]5

One may appreciate the policy implications motivating the reticence to provide clear parameters for contractors and thereby giving owners the legal room to move, but that is little consolation to a directive-facing contractor when it matters.

Despite the allure of the cardinal change doctrine when facing a scope-changing directive, only the most fearless —or stubborn—contractor decides to unilaterally determine the cardinality of a change and walk away.  However, walking away or capitulation are not the only options.  Courts and boards typically favor contract performance,6 and most contracts have some adequate method of resolving disputes over directives.  Regardless of a contractor’s belief regarding the cardinality of a directive, the most important thing a contractor can do to protect him or herself is to exhaust the contract’s dispute procedure and to document everything.  This is a good mantra most of the time, but it is especially important when following a directive; even if it is not particularly contentious at the time.  Give timely notice,7 prepare cost estimates, and most importantly keep copious records documenting the impact of the change.  As much as possible, distinguish between the work being done in furtherance of the contract and the necessary work to perform the change alone.  The courts and arbitrators look unfavorably on a bad-faith obfuscation of costs as attempts to double-charge for work.  If the dispute progresses and remains unresolved, the actual costs incurred in performing the directive will be the best evidence of the money owed for the change directive.

Contractors should always take proactive steps to protect their interests to optimize their outcome.  The first and best measure is to always fully understand their rights and responsibilities under any contract they sign.  Relatedly, a good preventative next step is to pre-determine what the scope of the contract is, and is not.  This can be determined pre-bid either via a dollar amount or a clearly defined scope of work.  This proactive measure could cut both ways however, as a shrewd owner could take advantage of the limits.  However, this can be contractually protected against as well, and this protective pre-determination can provide guidance to the court in case of a dispute.

If you are facing an imposing contract or a change directive and have questions or concerns about it, consulting with an experienced legal professional about your rights and options may be the best option to protect your interests.  Preventing disputes is the best protection against them.   

 

1  The term “owner” is used throughout, but a cardinal change can equally apply to a contractor – subcontractor subcontract.

2  Cottage City Mennonite Church, Inc. v. JAS Trucking, Inc., 167 Md. App. 694 (2006).

3  Becho, Inc. v. U.S., 47 Fed. Cl. 595 (2000).

4  Wunderlich Contracting Co. v. U. S., 173 Ct. Cl. 180, 351 F.2d 956, 966 (1965) ("There is no exact formula for determining the point at which a single change or a series of changes must be considered to be beyond the scope of the contract and necessarily in breach of it.  Each case must be analyzed on its own facts and in light of its own circumstances, giving just consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole.").

5  Becho, Inc. v. U.S., 47 Fed. Cl. 595, 601 (2000).

6  From 1 Bruner & O'Connor Construction Law § 4:49 at Fn. 1 (“See F.A.R. § 52.233-1(i), 48 C.F.R. § 52.233-1(i) (‘The contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.’).  See also AIA Document A201-1997, Subparagraph 4.3.3 (‘Pending final resolution of a Claim except [as otherwise agreed], the Contractor shall proceed diligently with performance of the Contract and the Owner shall continue to make payments in accordance with the Contract Documents.’)).”

7  Veolia Water North America Operating Services LLC v. City of Atlanta, 2008 WL 5169525 (N.D. Ga. 2008) (continued performance without notice of cardinal change constituted a waiver of claim.).