An age-old rule of government contracting, both state and federal, is that the contractor cannot stop work in the face of a dispute with the owner. Instead, the contractor must continue its work “under protest” while it pursues its claim under the dispute resolution provisions of the contract. This rule was recently called into question by the Civilian Board of Contract Appeals (CBCA), an influential arbiter of federal contract claims, which held that a contractor was entitled to stop work on a Department of Veterans Affairs (VA) project, due to VA’s material breach of the underlying contract.

Kiewit-Turner, A Joint Venture (KT) was awarded a contract for preconstruction services on a medical center campus in Aurora, Colorado. The contract type was “integrated design and construct” (IDc). KT’s contract also included an option for construction services, under which KT would actually build the project.

Under an IDc contract, the contractor consults the owner as the design progresses, and makes recommendations regarding potential design changes and funding decisions, with the goal of achieving cost savings and other project efficiencies. By the time KT was brought on, however, the design was already 50% complete, and key funding decisions had already been made. This limited KT’s meaningful participation in the design and funding process.

On the same day that KT was awarded its contract – before KT could provide any input regarding the design or the budget – VA established the “estimated construction cost at award” (ECCA), which set the project’s construction cost target at $582,840,000. This would prove to be a fateful funding decision.

Once KT began its preconstruction services, it repeatedly advised VA that the design was incomplete, over-budget, and not properly coordinated, among other things. Despite these warnings, the VA did not take proper steps to control its design team (such as by insisting on additional value engineering [VE]). In addition, throughout this process, KT provided ever-increasing estimates of the project’s construction costs.

Although all of these estimates exceeded the ECCA, VA and KT eventually executed a modification that required VA to provide a complete design that could be built for the ECCA. In exchange, KT agreed to perform the construction work for a firm target price of approximately $603 million. (At this time, VA possessed an estimate from its construction manager that the construction would cost more than $677 million.)

The project continued to be plagued by VA mismanagement. VA did not provide 100% construction drawings in a timely manner, and the 100% drawings that were finally issued were several months late and incomplete. Meanwhile, the project’s costs continued to escalate dramatically, as the design team refused to provide adequate VE. Indeed, one estimate showed that construction costs could exceed $1 billion.

After spending over $20 million of its own funds to try to keep the project moving forward, KT requested a Contracting Officer’s Final Decision regarding whether VA had breached the contract. The contracting officer denied that VA breached the contract and directed KT to proceed with the work. KT then appealed to CBCA, where KT posed the following questions:

  1. Did VA obligate itself to provide a design that could be built for the ECCA?
  2. If VA materially breached the contract, was KT entitled to stop work?
  3. Did VA materially breach the contract by failing to provide such a design?

CBCA answered each of these questions in the affirmative. Regarding the first two, the Board held that the contract modification bound VA to produce a design that could be built within the ECCA price. The Board further held that VA breached this obligation and that this breach was material. Regarding the third question, CBCA ruled that KT was entitled to stop work as a result of VA’s material breach. Apparently key to the Board’s decision was the fact that VA had not requested or obtained any additional funding for the project.

The Board’s answer to the third question is unusual in government contracting. Almost all federal contracts include FAR 52.233-1(i), which requires a contractor to proceed with performance even in the face of unresolved disputes:

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.

In practice, the above Disputes Clause means that the contractor cannot stop work except under very limited circumstances. Instead, when a contractor and the government disagree (over whether certain work is outside the contract’s scope, for example), the contractor must reserve its rights and continue working under protest. The overriding rationale is that a contractor cannot be allowed to hold a project hostage by stopping work due to unresolved disagreements.

Here, without even mentioning the Disputes Clause, the Board held that KT was entitled to stop work. Driving the Board’s decision were its findings that VA’s mismanagement of the project was particularly egregious, as well as that KT had already financed over $20 million of work. Perhaps most important, however, the Board noted that the available funds were unquestionably insufficient and that VA had not requested any additional funding for the project. Because VA refused to redesign the work (to achieve necessary cost savings), KT had no expectation of being fully compensated for its work.

Nevertheless, federal contractors should think long and hard before considering stopping work, regardless of the scope of the disagreement. This is because the vast majority of the time, the Disputes Clause will require the contractor to continue to perform. The KT decision, rather than changing the age-old rule, simply represents a rare exception to it.

By Kirk J. McCormick of Hinckley Allen