Unintended Consequences of a Federal Government Shutdown

Unintended Consequences of a Federal Government Shutdown

October 3, 2013

By Mark R. Becker

Contractors who have had their construction projects suspended during the federal government shutdown (“Shutdown”) over the funding of the Patient Portability and Affordable Care Act, may suffer critical path delays and increased costs because of the suspension. While Congress and President Obama work out their disagreements, delays and additional costs on federal construction projects may pile up and cause grievous harm to contractors. This article briefly discusses several topics that may be relevant in assessing a contractor’s entitlement to additional time and costs associated with the Shutdown. This article is not intended to be a comprehensive analysis or to constitute legal advice. Contractors concerned about their rights should contact a legal professional for advice about their particular situation.

1.  Time Extensions

Contractors suspended by the Shutdown may be entitled to a time extension. Contractors facing the potential of liquidated or other damages for failing to timely complete should consider making a time extension request and request for relief from liquidated damages or other time related damages. While the Shutdown may qualify as an excusable, perhaps compensable, event of delay justifying a time extension, the burden will be on the contractor to demonstrate the impact of the Shutdown on the contractor’s schedule. Depending on the language of the contract, the contractor may be required to support its time extension claims using Critical Path Method schedule analysis. While on the surface it may appear that a time extension associated with the Shutdown would be relatively easy to obtain, contractors should pay careful consideration to the question of how much float there may be in the overall schedule. If the length of the suspension turns out to be less than the total overall float available on the contractor’s schedule, the suspension could simply consume the float and not entitle the contractor to an extension of time. See Appeal of Robglo, Inc., 91-1 BCA P 23357 (1990) (denying time extension where contractor “failed to show any Government caused delay beyond the scheduled float”).

2.  Additional Costs

a.  Sovereign Acts Doctrine

The most recent federal government shutdowns occurred in 1995 and 1996 during the Clinton administration, and precipitated some claims and decisions from the various boards of contract appeals. The analysis of whether a Contractor will be entitled to additional costs associated with the Shutdown may be influenced by the “Sovereign Acts Doctrine” applied by several courts during prior shutdowns. The Sovereign Acts Doctrine holds that the United States Government, “cannot be held liable for an obstruction to the performance of a particular contract resulting from the Government’s public and general acts as a sovereign.” See Raytheon STX Corp. v. Dep’t of Commerce, 00-1 BCA P 30632, GSBCA No. 14296-COM (1999) (citing Horowitz v. United States, 267 U.S. 458, 461 (1925)). The rationale behind the Sovereign Acts Doctrine is that the United States Government wears two hats in two different and distinct roles – one as a contracting party, the other as the sovereign. If the United States Government, wearing its sovereign hat, does something legislative or executive of a “public and general nature,” it cannot then be deemed to have altered, modified, obstructed, or violated the contracts it entered into wearing its contracting party hat. Id. (quoting Horowitz). The Sovereign Acts Doctrine attempts to “‘balance the Government’s need for freedom to legislate with its obligation to honor its contracts by asking whether the sovereign act is properly attributable to the Government as contractor.’” Id. (quotingUnited States v. Winstar Corp., 518 U.S. 839 (1996)). This balancing is to be performed on a case by case basis to determine on balance whether the act was “designed to target prior government contracts.” Id. (quoting Yankee Atomic Electric Co. v. United States, 112 F.3d 1569, 1574 (Fed. Cir. 1997), cert denied 118 S. Ct. 2365 (1998)).

In Raytheon STX Corp., the contractor sought additional costs associated with the government shutdown during the Clinton administration. That particular shutdown was the result of the “failure of the Congress and the President to enact appropriations legislation and was not specifically targeted to any Government contracts.” See Raytheon STX Corp. Thus, the shutdown was a “public and general act.” Id. However, the Raytheon STX Corp. court refused to end the inquiry there to bar the claim based on a simplistic analysis of the Sovereign Acts Doctrine. Instead, the court focused on the terms of the contract between the contractor and the government because, while the United States cannot be liable for public acts it performs as a sovereign, it can be liable if it agrees, expressly or impliedly, in a contract to pay “the other contracting party the amount by which its costs are increased by the Government’s sovereign act.” Id. (citing D&L Construction Co. & Associates v. United States, 402 F.2d 990, 999 (Ct. Cl. 1968)).

The court in Raytheon STX Corp. examined the contract in question and found that the government had promised that the government’s facilities would be accessible to the contractor for performance. Id. The court determined that this promise carried an implied promise that if the facilities were not accessible for performance, the government would bear the resulting increased costs. The facilities at which the contractor was supposed to work were closed because of the government shutdown, through no fault of appellant. Id. The court stressed that its decision did not rest solely on the government’s implied obligation to provide site access, but also on the fact that the contract was a cost-reimbursable type contract with Stop-Work Order clauses providing a mechanism for reimbursement of costs associated with increased costs while Stop-Work Orders were in place. 

Thus, the Raytheon STX Corp. did not bar the contractor’s claim based on the Sovereign Acts Doctrine.Instead, the court allowed part of the claim, and barred other parts of the contractor’s claim on more conventional grounds, including that the contractor did not incur the costs it was claiming, or demonstrate that certain of its costs were properly allocable under FAR cost principles. Id. The contractor also was criticized for not mitigating its damages when it instructed its workers to stay home instead of attempting to allocate them to different jobs.

In contrast to Raytheon STX Corp., the contractor in Appeal of A-1 Real Estate, Inc., 97-2 BCA P 29123, HUDBCA No. 96-A-123-C11 (1997) had its claim for “restitution of lost revenue” during the Clinton era shutdowns denied because of the Sovereign Acts doctrine. The contractor in A-1 Real Estate failed to show any particular provisions in its contract supported its claim. Importantly, the court refused to find that the Government’s implied obligation not to hinder or delay a contractor was not alone sufficient to avoid the Sovereign Acts Doctrine. Instead, the court noted that while it was an accepted principle that “neither party to the contract will do anything which would prevent, hinder, or delay performance by the other party,” an “exception, however, is allowed in the case of a sovereign act.” This reasoning seems to be at odds with the Raytheon STX Corp. court’s reasoning that implied obligations were the exception to the sovereign acts doctrine, not the other way around. However, both courts emphasize that express provisions in a contract allowing compensation for suspensions in addition to implied obligations are helpful to finding an entitlement to additional costs associated with a federal government shutdown. Contractors should review their contracts for a Suspension of Work clause or other provision that may afford schedule relief as contractors should be prepared to address arguments based on the Sovereign Acts Doctrine.

b.  Eichleay Formula for Unabsorbed Home Office Overhead

Contractors suspended for a lengthy amount of time may have damages from the inability to absorb fixed home office overhead costs from suspended jobs because the revenue from those jobs is also suspended. The Eichleay formula was approved for the first time in Capital Electric Co. v. United States, 729 F.2d 743 (Fed. Cir. 1984). Although state courts do not always put conditions on the applicability of the Eichleay formula for calculating unabsorbed home office overhead, the federal courts and boards of contract appeals traditionally apply conditions before permitting the use of the formula. Traditionally, the three elements necessary to recover Eichleay damages are: (1) a government-imposed delay; (2) the government required the contractor to stand by during the delay; (3) and while standing by, the contractor was unable to take on additional work. See Satellite Electric Co. v. Dalton, 105 F.3d 1418, 1421 (Fed. Cir. 1997).

c.  Other Claim Categories

Contractors facing suspensions may suffer other damages that can be recovered under certain circumstances. For example, a contractor may be “entitled to an equitable adjustment for additional costs in keeping equipment on-site which must remain exclusively dedicated to the project to assure the ability to perform.” See Herman Taylor Const. Co. v. General Services Admin., 96-2 BCA P 28457 (1996). Contractors may also have additional security expense during the shutdown and remobilization costs whenever the shutdown is lifted. Furthermore, contractors may have work pushed into different periods of weather not contemplated at the time of contracting. Winter conditions necessary to protect concrete or masonry may be recoverable, as well as associated labor inefficiencies that may occur. If a contractor is not afforded schedule relief, the contractor may have a claim for constructive acceleration and be able to claim overtime costs and costs of overtime inefficiencies. The types of damages contractors may suffer are numerous and the foregoing is not an exclusive list.

3.  Conclusion

The longer the Shutdown lasts, the greater the unintended consequences may be for those contractors who may have had their projects suspended because of the Shutdown. Contractors uncertain of their rights due to the Shutdown should contact counsel.

For more information, contact Mark Becker at 612.359.7620 or mbecker@fwhtlaw.com.


This discussion is generalized in nature and should not be considered a substitute for professional advice.© 2013 FWH&T