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Under a government contract, who pays for hurricane damage?

During the performance of a contract, unanticipated circumstances can arise which increase a contractor’s costs. Sometimes, the contract allocates the risk of the unexpected event as, for example, when a contract provides that the agency will bear the risk if a contractor encounters a differing site condition that increases the contractor’s costs. In other circumstances, a principle of common law establishes which party will bear the risk of an unexpected occurrence. For example, case law provides that an agency’s failure to disclose facts to a contractor can, in some circumstances, result in the agency’s bearing the risk of unanticipated performance difficulties that increase the contractor’s costs.

Most contracts contain no specific contract provision that places the risk of hurricane damage upon the contractor or the government. Nevertheless, in such an instance, the cases uniformly state that, in accordance with common-law principles, the contractor must bear that risk.

An example: Damage from Hurricane Georges during 1998

In Trataros Constr. Co. v. General Services Administration (GSA), GSBCA No. 15081, 01-1 BCA P 31,310 (G.S.B.C.A. 2001), the contractor asserted that GSA should equitably adjust the contract price to cover the cost of replacing 1,347 roof tiles that were damaged by Hurricane Georges when it hit the island of Puerto Rico. The contractor argued (1) it could not obtain insurance that covered the hurricane damage and (2) there was nothing that it could have done to protect the roof tiles from hurricane damage. The contractor did not point to any provision in the contract or to any case law that placed the risk of a hurricane upon GSA in either of these two circumstances.

Request for equitable adjustment

The contractor’s request for an equitable adjustment to the contract price stated that the work required as a result of a Hurricane Georges amounted to a change to the contract. The contract required GSA to bear the risk of any changes that it made to the contract work and to equitably adjust the contract price to compensate for any added costs that Trataros incurred as a result of a change.

General Services Board of Contract Appeals decides against contractor

According to the GSA Board, the evidence did not establish that the work for which Trataros sought an equitable adjustment resulted from a change that GSA made to the contract’s requirements. The claim includes amounts for securing roof tiles and other loose items, protecting windows, cleaning debris, securing a crane, repairing a fence, dewatering, and repairing a window. All of these items were costs that the contract, as awarded, required the company to absorb.

The contractor was required to keep the work area free from accumulations of waste materials, to remove rubbish, and to leave the work site clean and neat. It was required to dewater the site. It was also necessary for the contractor to replace windows and to be responsible for all materials delivered and work performed until completion and acceptance of the work. The contractor was further obligated to preserve and protect roofing materials and all structures and equipment on the work site and to take all precautions necessary to protect the building during construction.

The GSA Board held the claimed costs were for work within the scope of the contract work as awarded, and not costs that resulted from a change made by GSA to the contract. Although no specific contract provision said which party will bear the risk of a hurricane, the GSA Board found that a body of case law placed this risk upon the contractor:

A hurricane is an act of God and [i]t is a general principle of law that neither party to a contract is responsible to the other for damages through a loss occasioned as a result of an act of God, unless such an obligation is expressly assumed. In the absence of a contract provision to the contrary, if a contract specifies that a contractor is required to perform certain work and is responsible for that work until it is accepted, and an act of God either makes the work more difficult or expensive or damages the work before it is completed and accepted, the contractor must bear the added costs that are caused solely by the act of God (citations omitted).

All of the costs claimed were the result of Hurricane Georges. As such, the contractor accepted the risk of incurring these costs under a firm-fixed-price contract. See FAR 16.201(a), 16.202-1. (A firm-fixed-price contract is not subject to any adjustment on the basis of the contractor’s cost experience except as allowed by a contract clause permitting an equitable adjustment.)

Lesson learned

A lesson to be learned from the Trataros case is the essential need for a contractor—especially a construction contractor working in hurricane-prone areas—to have adequate insurance (here, builder’s risk insurance) to cover severe weather that could realistically disrupt or damage contractor operations. The only other alternative would be to request indemnification from the government under Pub. L. No. 85-804 (see FAR Part 51), but the government rarely approves such requests.

If, as in Trataros, possible damage from a hurricane is uninsurable, the contractor should think long and hard about taking on the project in the first place.

Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.

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Thursday, 05 December 2019

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