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Kent Holland, J.D.
ConstructionRisk, LLC

A subcontractor performing masonry work for renovations of buildings at the Langley Air Force Base recovered in a breach of contract action against the Prime Contractor who, after receiving full payment for the subcontractor’s invoices from the government, failed to pay the subcontractor for the work that had been accepted by the government. In assessing the amount owed to the subcontractor, the court found that the subcontract for one aspect of the project contained a lump sum amount entitling the subcontractor to full payment of that amount, even though the actual work needed was only a small fraction of what had been anticipated by the government and the contractor when bidding the project. The court explained that the subcontractor gets the full financial benefit of having to do less work than anticipated, just as it would have to take the full loss if it had to do more work than it had estimated under the lump sum priced contract.

The court also found that where a deductive change order was issued for one of the work items, the Prime was only entitled to withhold from the subcontractor the amount that the Prime negotiated with the government for that deduction. The Prime had withheld a much higher amount “in order to make up for lost profits on other aspects of [the] prime contract. The court found that the credit for the deductive change that the Prime had negotiated with the government was reasonable and the Prime “cannot now seek to recoup its losses by demanding a higher credit amount.”

Judgment was also entered against Hanover Insurance Company, the surety for the Prime, based on joint and several liability under the Miller Act.

U.S. ex rel. Sprinkle Masonry, Inc. v. THR Enterprises, Inc., 2015 WL 1518900 (United States District Court, E.D. Va. 2015).

Partial Payment on Invoices – Unjust Enrichment. Per the subcontract, the subcontractor submitted monthly payment applications to the Prime each month, the amounts of which were then submitted to the federal government the following month as part of the Prime’s pay application. The Prime was obligated to pay its subcontractors within 15 days of receiving payment from the government.   The court reviewed numerous invoices submitted by the subcontractor which showed that the Prime was paid in full for those invoices by the government, but then withheld part of the payment from the subcontractor. The court found that this was a breach of contract, or in the alternative, the subcontractor was entitled to recover the full amounts of its invoices under the legal theory of “unjust enrichment.” The court explained,

Under Virginia law, a viable breach of contract claim has three elements: “(1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant’s violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation.”Filak v. George, 594 S.E.2d 610, 614 (Va.2004). “Under Virginia law, an action for unjust enrichment ‘will lie whenever one has the money of another which he has no right to retain, but which ex aequo et bono he should pay over to that other.’” Fed. Ins. Co. v. Smith, 144 F.Supp.2d 507, 523 (E.D.Va.2001) (quoting State of Qatar v. First Am. Bank of Va., 880 F.Supp. 463, 466 n. 4 (E.D.Va.1995)). Therefore, to prove its unjust enrichment claim, [the subcontractor] must prove first, “that it had a preexisting right to the money,” and second, “that the defendant justly should not retain the money.” Id.

Mobilization Costs. As part of the litigation, the subcontractor claimed it was entitled to interest on $10,000 in “mobilization” costs associated with stopping and starting its work. The court said there was no dispute that the subcontractor was entitled to the mobilization costs but that there was a dispute concerning when the Prime was obligated to pay those costs. This was relevant, since interest would accrue from that date.

The subcontractor had performed approximately 80 to 85% of the total work required on one of the two buildings under its subcontract when the government issued a stop work order. After the work order was lifted, the subcontractor offered to return to the job but asked the Prime to arrange for the construction of concrete footers so the subcontractor could perform the brick-work for a new addition at the same time it completed the tuck pointing and washing on the original renovation work.

The court found that it would not have been cost-effective for the Sub to return to the jobsite unless it could complete all aspects of its work, including the renovation work and the brick work on the new addition. Since the Prime had not arranged for the concrete footers to be constructed as requested by the subcontractor as of the trial date, the court concluded that the Sub could not yet return to the job. But the Sub had “established that it is prepared to return to the jobsite, but is precluded from doing so by [the Prime].   Author’s note: This is an interesting conclusion in that the court essentially allowed the subcontractor to dictate the conditions under which it would return to the jobsite. This was apparently entirely for the convenience of the subcontractor and the court permitted this, and even blessed it.

Lump Sum vs. Unit Price Contracting. The aspect of this decision addressing the question of whether the Prime could refuse to pay the subcontractor the lump sum price that the sub bid for certain work is so well explained that it is being quoted at length below. The explanation concerning the risks and rewards that a contractor bargains for with a lump sum bid is excellent. The fact that the subcontractor might end up with a windfall if it does not have to do as much work as expected does not change the terms of the contract that obligate the government and the prime to pay the subcontractor the full amount of the lump sum.

Sprinkle agreed to repair 5,000 square feet of exterior brick as required for $41,771, making the total value of the original subcontract $167,303.

The 5,000 square feet of brick repair “as required” meant that the subcontractor would perform whatever repair work was necessary, including replacement of broken bricks, tuck pointing or other repair work, for as much as 5,000 square feet of area. As Joseph Ziegler, Sprinkle’s masonry and contracting expert witness explained, the amount bid by the subcontractor was his estimate of what it would cost to perform the necessary repair work for 5,000 square feet, plus a reasonable profit. The subcontractor bid the lump sum amount with the understanding that there was a risk that, if substantial repairs were required, his bid amount might be too low and he would lose money on the contract. Alternatively, the subcontractor would understand that, if substantial repairs were not required, then he would not lose money on his bid. His hope, of course, is that amount bid would cover whatever costs he incurred to repairing up to 5,000 square feet of brick, plus allow him a profit. The bid amount, therefore, was not a “unit price” bid meant to reflect a specific price per square foot of repair.

Had the subcontract meant to solicit a unit price, then such unit price would have been reflected in the bid proposal. It was not. THR calculated that the bid amount of $41,771 for 5,000 square feet of brick repair equaled a unit price of $8.35 per square foot. Consequently, THR contended that Sprinkle was only entitled to payment for the amount of brick repair work actually required to be performed. However, the bid proposal very clearly provides a lump sum amount for the brick repair work. The defect in THR’s position is apparent from its argument that Sprinkle only performed 15 square feet of brick repair. Under THR’s interpretation, Sprinkle would be entitled to $125.25 under the contract. Given that the parties’ determined that mobilization costs alone totaled $10,000, a contract agreement to perform as little as 15 square feet of repair work makes no sense.

Clearly, the government thought 5,000 square feet of repair work would be necessary, and Sprinkle factored in the extent of repair work which might be required when making its $41,771 bid. Had the government, THR, or Sprinkle intended this task to have been bid and awarded as a unit pricing contract, such designation would have been both explicit and apparent on its face. Accordingly, the Court FINDS that this is a lump sum, not a unit price, contract.

Credit Prime Negotiated with Government on Deductive Change Must be Given in Total to the Sub (Ethical Issue)

After negotiating a $20,000 credit to the government for the subcontractor’s   contract, the Prime sought to recoup almost $$48,000 in credit from the Sub, “ostensibly because this amount more accurately reflected the value of the work that was eliminated.”   The court explains the Prime’s reasoning as follows:

THR [the Prime] contended that the subcontract specifically gave THR the right to issue change orders to reduce the scope of the subcontractor’s work. Further, THR contended that it was required to make other sacrifices to its bottom line in order to induce the government to accept its proposed contract modification. In THR’s view, all of its subcontractors should have had to share in THR’s cost sacrifice. The defect in THR’s argument is that, once THR negotiated with the government the specific amount of the credit for the elimination of the precast sills and lintels, THR was not free to exact from its subcontractor a higher credit, allowing it to keep the difference. Mr. Zeigler testified that such conduct would be unethical in the government contracting arena, and it certainly strikes the Court as so.

The court concluded that, “While THR may have made sacrifices to its bottom line in order to advance its overall interests in the prime contract, nothing in the subcontract gave it the right to exact concessions of this sort from Sprinkle [the subcontractor].”

Comment: This decision has so many lessons that can be learned that it would be easy to use this single decision to teach a short seminar on key principles of contract law and especially public contract law. This is a decision worth filing away for future reference.

 

About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 18, No. 1 (January 2016).

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