September  20, 2002



Bulletin #61, Design v. Performance Specifications (September 20, 2002)

ZZZ Sheet Metal had developed an expertise in “clean room” and other filtration technologies through its work with the computer chip manufacturing industry. This capability was well known. As a result, ZZZ was made aware of the opportunity to bid on installation of the air-handling and ventilation system for a military research facility. The project was to involve the upgrading of large components of an existing system, and installation of certain new equipment. The request for bids stated that all operations at the plant must continue in an uninterrupted manner throughout the construction period. The contractor for the system upgrade would be required to develop a demolition and construction plan that complied with all the contract’s requirements, including the requirement of uninterrupted operation.

ZZZ was ultimately declared the winning bidder on the new system. The firm submitted its detailed plans for demolition of certain components of the existing system, and installation of the upgraded and replacement equipment. In response to the “continuous operation” requirement, ZZZ’s plan involved shutting down components of the research facility in limited stages. The overall facility would continue to operate, but discrete areas within the facility would be worked on sequentially. During the applicable work, manufacturing and testing within each area would be suspended for only limited periods of time. It was the contractor’s expectation that these limited and discrete suspensions of operations would not materially interfere with the function of the facility, and would maximize the efficiency of the installation process. ZZZ’s project manager was quite pleased with the cleverness of the proposed scheme.

The government was not as pleased. After a six-week review process, the contractor’s plan was rejected. ZZZ was ordered to submit a new plan that would not involve the shut-down of any significant elements of the existing facility. Along with rejecting the ZZZ proposal, project management staff presented some ideas for sequencing that might avoid the shut-down of significant components of the plant, although making the actual performance of the work far more difficult and complex. ZZZ then embarked upon a three-month effort of consultation with mechanical engineers, production system experts, equipment vendors, and other contractors to figure out whether it could somehow accomplish what appeared to be impossible. The contractor clearly understood that the performance of its work could potentially damage sensitive research components and equipment, and that necessary testing of the upgraded system could also compromise air purity conditions within the facility. Any mistakes or accidents (i.e., the collapse of scaffolding onto testing machinery or computer equipment) could produce consequences almost too great to measure. After an incredible effort and input from numerous other parties, the contractor put forth a plan that would substantially meet the government’s requirements, although at considerably greater expense. Almost five months had passed since the award of the contract, and no work had yet been performed. An already-challenging proposed schedule had obviously become impossible, and ZZZ submitted its revised plan along with a request for an adjustment to the price and an extension of the contract completion date. ZZZ asked only for the five months lost in the planning process, even though the work phase would also be rendered considerably more challenging by the changes in the approach to the work. Within a week of ZZZ’s submittal, the project management team denied the requested changes as to both the price and the extension of time, and ordered the contractor to proceed with the work.

ZZZ pressed ahead under the nearly impossible schedule. Working overtime, weekends and holidays with every available laborer, ZZZ was barely able to complete the project in accordance with initial schedule. After completing the work, ZZZ commenced a lawsuit seeking compensation for the consequences of the delay resulting from the need to redesign its work. The overtime alone had turned a potentially profitable project into a huge money loser for the contractor. At trial, ZZZ asserted that the “continuous operation” requirement in the original bidding materials was ambiguous since there was no feasible way to complete the work without at least temporary shutdowns of portions of the facility (even for very short periods of time). ZZZ’s attorney argued that the real problem was with the design, and not the contractor’s performance. He concluded that if what was being proposed was a “design specification,” the responsibility for flaws in the design should fall upon the government, and ZZZ should be entitled to compensation. Both the ambiguities in the proposal, and the existence of a “design specification” supported the payment of such compensation.

The government responded by asserting that it had sought a level of performance only, and had not compelled the contractor to achieve that performance by utilizing any specific design or plan. In addition, the government argued that the project requirements were in no way ambiguous, and that the description of “continuous operation” could hardly have been more clear as to how the system was to function, and the work to be conducted. The government argued that ZZZ was not entitled to any compensation since the delays had all arisen out of its failure to initially propose a design that was responsive to the project’s requirements.

The court’s decision did not please the contractor. The judge’s order stated that it had obviously been possible to perform the project without significantly interrupting operations, as demonstrated by ZZZ’s modified proposal. In addition, the court held that the meaning of “continuous operation” was not ambiguous. Therefore, ZZZ’s original plan calling for the sequential shutdown of components did not comply with the unambiguous contract requirements. In addition, the judge ruled that even if the “continuous operation” language had been ambiguous, the ambiguity would be of such a type (‘patent’ as opposed to ‘latent’) as to require the contractor to make inquiry before submitting its bid. In the absence of such an inquiry, the court would hold the contractor responsible for the delay necessitated by the revisions to its plans.

The last element of the ruling concerned the design issue. The court found that the contract was a “performance contract,” rather than a “design contract.” The contractor’s obligation was to achieve a certain outcome rather than to follow detailed specifications mandated by the government. Since the delay related to the contractor’s efforts to meet the performance standards, rather than attempting to satisfy any government design criteria, the contractor was liable for the delays. No change or additional compensation was held to be appropriate under the circumstances. The contractor would have to absorb the additional costs incurred in completing the project on the expedited schedule.

With the increasing prevalence of design/build construction, performance specifications are frequently encountered by contractors and subcontractors. While this approach allows considerably greater flexibility for the construction professional in meeting project requirements, it also involves its own inherent legal risks. Most importantly, it is essential that contractor or subcontractor carefully assess the intent and feasibility of a performance specification prior to bidding. Any ambiguities or inconsistencies should, to the extent possible, be resolved before the submittal of a bid. If the subcontractor ignores an unreasonable or ambiguous performance specification in accepting the work, it will likely face the consequences of an adverse determination during or after the project.

 

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