July  27, 2001



Bulletin # 49: We Built What You Asked For

Despite an extraordinary run of bad luck on its projects, ZZZ Sheet Metal had somehow managed to keep its doors open. When company management learned that a new VA hospital was to be constructed in the area, things started to look somewhat brighter. ZZZ had extensive experience with that type of project, and a friendly, former employee was well placed in the local General Services Administration office. Over an informal lunch, the president of ZZZ spoke with the former employee about the merits of specifying all of the HVAC work on a “direct bid” basis, and the potential savings that could be generated. Ultimately, the former employee decided to recommend such an approach. Interested in the potential savings, the GSA structured the major components of the project utilizing direct bids. The GSA had hired national architectural and engineering firms to prepare the plans and specifications for the hospital, and ZZZ waited to receive a bid package.

When the bid materials arrived, they included very detailed plans, as well as performance specifications for the system. The contractor took note of the system’s complexity, and the number of innovative elements, but believed that it could perform the necessary work. ZZZ submitted its bid, and was the low bidder. At that point, ZZZ received the actual contract form for the HVAC work. In a brief review of the form, the ZZZ contract administrator noted nothing particularly unusual, had the form signed, and returned it to the GSA. ZZZ was relieved to now be working on a project where the owner would not only have the willingness, but also the ability to pay for the work that was done. ZZZ’s president called the company’s “friendly banker” to inform him that the company’s cash flow situation was expected to dramatically improve.

Over half of the HVAC system had been installed as of the date ZZZ was called to an emergency meeting with representatives of the mechanical engineer, the architect, and the GSA. The GSA project manager opened the meeting by declaring that the HVAC system, as it was being installed, would not come close to meeting required performance specifications. The system would require redesign, and the installation of a great deal of additional ductwork and air handling equipment. The senior GSA representative pointed at the ZZZ project manager, and declared “this one is on your nickel.” When the ZZZ manager protested, the GSA official and architect pointed to language in the contract requiring ZZZ to “review and verify all site conditions,” “to review and approve the plans and specifications, and to identify any defects or deficiencies therein,” and to “otherwise inform itself as to the requirements of the work in such a manner as to insure conformity to the system performance requirements.” It was emphasized that ZZZ was an extraordinarily experienced HVAC contractor that had specifically requested total control of its work through a “direct bid” approach. It had both the capability and responsibility to point out obvious design defects. The architect and engineer were to work with ZZZ on the re-design, and the remedial work was to commence as soon as possible. The ZZZ project manager was then ushered out the door. The contractor could not afford to walk away from the project, and it was obvious that the defective design issue was not going to be resolved in short order. ZZZ management decided to proceed with the project under protest, and to reserve its rights to demand additional compensation for its costs related to the re-design and remedial work. It provided notice to the architect and GSA to that effect. In the foreseeable future, the firm would be forced to fund the cost of extensive work on which it might never be paid. It was not long before the banker started calling again, and recommending a reduction of the company credit line. The firm’s survival was once more hanging in the balance.

By the end of the job, the extra costs incurred by ZZZ totaled nearly 50% of the original contract amount. The re-design and remedial work had gone as well as could be expected, but there was no way to avoid the impact of the extra costs. Having gotten nowhere in appeals to the architect and mediation with the GSA, ZZZ prepared to slug it out at the Board of Contract Appeals. Management was extremely nervous given the language of the contract. At the Board hearings, each party generally reiterated the arguments they had made at the fateful meeting in the GSA offices months before. The architect and engineer squirmed uncomfortably as ZZZ’s counsel questioned them about their preparation and approval of the defective plans. However, the GSA emphasized ZZZ’s unique experience, and its high level of responsibility as a direct bidder. The GSA attorney pointed out the inconsistency between ZZZ’s position that the defects in the system design were severe, but that it also had no obligation to detect those defects. The GSA’s position sounded even more persuasive when the contract language appeared in bold on a screen before the Board. How would the contractor avoid all of the “verification” and “insure conformity” undertakings that had clearly been called for under the contract it had signed?

When the decision of the Board finally arrived, it shocked company management. The Board cited what it referred to as the “Spearin doctrine,” based upon an over eighty-year-old U.S. Supreme Court case (Spearin v. United States, 248 U.S. 132 (1918)). The Board referred to the existence of an “implied warranty of specifications” under Spearin. It stated the contractor had a right to assume that the detailed specifications that had been provided by GSA for the project would result in a system that would meet the project’s performance requirements. The contractor had not been paid to undertake design responsibility, and was specifically required by contract to comply with every detail of the architect’s and engineer’s design as presented. The Board was unwilling to impose liability for an inadequate design on a party not responsible for the design. As to the “verification” defense, the Board indicated that the complexity of the design was such that the defects would not be readily apparent in a contractor’s review of the plans. Finally, the Board indicated that, under Spearin, the GSA could not escape responsibility for the costs incurred in remedying its design defects by including general language in the HVAC contract. The Board suggested that the GSA’s remedy, if any existed, was against the architect and the engineer for possible negligence related to the design. ZZZ’s recovery was large enough that its banker’s calls began to concern golf dates, rather than termination of the company credit line.

While the trend toward assumption of design responsibility by contractors is unlikely to change, contractors should not blindly assume that they have legal responsibility if a design prepared by another party does not meet performance specifications. The Spearin doctrine, as it has further evolved in various jurisdictions, may well protect the contractor from liability, even in the face of “verification,” and “insure performance” language in the contract itself. 

 

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