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4 Tips When Dealing with Constructive Changes

4 Tips When Dealing with Constructive Changes

Generally, contractors only get paid for additional goods and services furnished under a government contract if there is a valid modification to that contract.  So what happens when a contractor provides an additional benefit to the government that was not included in the contract, and there was no modification to the contract to support this action?  Contractors may recover if the courts find there was a constructive change.

A constructive change is when a judge finds that the government said or did something to compel the contractor to perform additional work under a contract, and the contractor should in turn be compensated for that “change.”  It is important to note that this is a determination made by a court after a contractor has filed a suit for recovery.  The change is called a “constructive change” because a judge construed it.  A judge does not have a warrant, and therefore cannot issue a formal change, but they can construe a contract pretty much any way they want in the interest of fairness.

Here is a great definition of a constructive change:

“A constructive change occurs where a contractor performs work beyond the contract requirements, without a formal order under the Changes clause, either due to an informal order from, or though the fault of, the government.  Before the contractor can recover, it must show that the government ordered it to perform the additional work.  The contractor cannot merely show that the government disapproved a mode of performance.  Rather, the contractor must show that the government actually compelled the additional work.  The government order need not be formal or in writing.  The additional work must be beyond the requirements of the pertinent specifications or drawings.  At the same time, the additional work performed by the contractor cannot be beyond the general scope of the contract.  Drastic modifications or fundamental alterations ordered by the government beyond the scope of the contract will constitute a breach of contract.  The additional work must therefore be beyond the requirements of the contract, albeit still within the general scope of the contract” (NavCom Defense Electronics, Inc. v. England, 53 Fed.Appx. 897 (Fed.Cir.2002)).

Government employees have to be especially vigilant when dealing with contractors because it is not just the contracting officers that can, and frequently make, constructive changes.  In order to perform almost any contract, the government and contractor technical communities must directly interact with each other.  Frequently, the government technical may need a little tweak here or there, and thinking that the new requirement is covered under the existing contract, requests the contractor to make the changes without consulting the contracting officer first.  The government technical POC has now changed the contract and exposed the government to additional liability.  This is true even if the contract explicitly states, as most do, that no one other than the contracting officer has the authority or capability to issue a change to the contract.

Here are some tips to help prevent constructive changes and encourage formal changes:

Tip #1: Understand the Basics of Contracting

How can one understand a nuance of a contract, without understanding the basic mechanics of how contracts are formed and operate? If one knows what a contract is supposed to look like, in theory, they will know when it has changed.  In my experience, most people treat contracting vehicles like actual vehicles: they get in, drive it to where they need to go, and don’t concern themselves with how the mechanics work under the hood.  On the contrary, I believe that it is the duty of every contractor to educate the individuals performing a contract with basic government contract law.  Every government contractor employee needs to understand what an offer, acceptance, and consideration are, and more importantly, who in the government is authorized to speak on the government’s behalf on a particular issue.

Tip #2: Keep Detailed Negotiations Records

The tricky thing about constructive changes is that they are hard to spot when performing a contract.  Contracting officers may think they are merely “interpreting” a contract, or a technical POC may think it is a minor adjustment.  So how do you know it’s really a change?  First you need to be very sure of what the contract actually includes.  Again, if one understands what the contract is, they will be better able to identify when it has changed.  This can be quite difficult for contracts that were modified during negotiations to fit a certain scope and budget.  It is not uncommon for large contracts to undergo hundreds of modifications when in negotiations.   Be sure to keep a detailed Bass of Estimate matrix that includes the number of hours with each task associated with those hours, and any changes resulting from negotiations.  If the government asks for any effort that is outside what is included in the estimate, it’s a potential change that requires a formal contract modification.

Tip #3: Use Your Contract Specialists and Administrators

Any type of change needs to be communicated through both the government’s and the contractor’s Contracts departments.  Contracts departments act as filters, and if issues are processed by both Contracts groups, they will more likely be able to assess the situation, identify a change, and process a formal contract modification before any work is started.   A formal change is much cleaner and easier to follow, and those individuals who are involved in the long and arduous process of closing out a contract will thank you for it.

Tip #4: Don’t Do the Work

This concept is simple, but it can be very difficult when under pressure.  When the customer needs a certain emergency repair, they need it in three days, and it just so happens that you have a guy already doing a similar repair nearby and can stay a few extra days to help with the other issue, it’s easy to go ahead and comply with the request.  Contractors must understand that by doing so, they take the risk of not getting compensated for the additional effort.

In reality, nobody wants to burn bridges with their customer and risk there being bad blood right before their contract is up for renewal.  I am a firm believer in always conducting a cost/benefit risk analysis.  If the risk is small, but the possible benefit is huge, it makes sense to take the risk and perform the job.  Risking not getting paid for $3,000 worth of effort, but building credibility and establishing goodwill with government because of the quick response may make it worthwhile.  Every contractor will have to decide what is best for them as each situation arises.

Thanks for reading.  Cheers!

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