The U.S. Army Corps of Engineers (USACE) incorrectly interpreted and applied contract specifications to require a contractor to do high grade drywall finishing in the plenum above walls and in the plenum below floors – areas that would never be seen by the public. A government inspector imposed this requirement only after the contractor was almost completed with its large contract. This was also after the government had throughout the work, inspected and accepted the drywall finishing. The normal trade practice was to only do high grade finishes for the occupied visible walls, and just do basic taping and one coat of drywall mud in non occupied spaces. At tremendous cost, the contractor redid the work under protest. The government contracting officer denied the contractors change order request, Request for Equitable Adjustment, and “claim” for the extra costs. The contractor naturally appealed this unfortunate and ill advised denial to the Armed Services Board of Contract Appeals. In an excellently reasoned decision, the Board held in favor of the contractor – finding that the contract language was ambiguous and under the principle of Contra proferentem, the contract must be interpreted in favor of the contractor. Appeal of KiewitPhelps, 19-1 BCA P 37319, 2019 WL 2052448 (2019).
Joint venture partners Kiewit and Hensel Phelps (“KiewitPhelps” or “KP”) were contracted to construct a five-level, one million square foot facility to replace the U.S. Strategic Command complex at Offutt Air Force Base. KP’s drywall subcontractor understood the bidding documents to only require what is called Level 4 drywall finishes for exposed walls. During the appeal, it was determined through discovery that all other bidders had the same understanding and bid in the same manner for the drywall. An expert witness testified that the industry standard practice is to apply Level 1 (fire-taping) finish above ceilings and below floors and to apply Level 4 or 5 only where decoration is to be applied.
The government apparently understood the contract specification in the same manner during performance of much of the work because the contractor was a year and one-half into the project – with the government inspector having accepted the Level 1 finishes. But then a new inspector came onto the scene and read the specification differently and insisted that Level 4 finishes were required on all surfaces regardless of the fact they were many feet above the ceilings where no one could see them – or a foot or two below the floors where the surfaces couldn’t be seen.
For some reason, the contracting officer went along with this unfortunate interpretation, and the contractor was required to take apart ceilings and floors and go to great expense to access the unfinished wall surfaces and apply Level 4 finishes. This was made particularly difficult by the fact that much of the mechanical/electrical equipment had been installed above the ceilings and the floors and was in the way of re-doing the drywall finishes.
Before embarking on the expensive remedial action, the contractor warned the government that it would be at tremendous cost (perhaps up to $5 million) and that the contractor would be making a claim for payment of the same because it deemed this to be a change to the contract requirements.
In reviewing the facts of the case, the Board reviewed testimony and found that the government didn’t dispute the fact that the contractor entered into the contract with a different understanding of the contract requirements than what the government now maintains was intended.
The government didn’t help clarify any ambiguity when it easily could have done so through a pre-bid inquiry that asked about the drywall levels. Instead of clearly responding the following inquiry, “Please identify where each finish level is to be applied,” the government answered with information about how the drywall was to be “painted” instead of how it was to be “finished.”
The Board concluded that the record is “replete with evidence that [contractor’s] interpretation is well within the zone of reasonableness….” The Board states, “As we have determined that the fire-taping required by paragraph 3.11.6 is a Level 1 finish, USACE’s argument that only Levels 4 and 5 finishes are allowed by the contract is incorrect. This supports [contractor’s] interpretation.”
The Board also found that Trade Practice may be useful in interpreting the contract and that comments by the government at a pre-bid meeting where it was “agreed that fire-taping was all that was required above ceilings and floors” was important. Plus, said the Board, the course of dealing can be used to interpret contracts, and both parties here interpreted the contract the same way for over a year and half before the government suddenly requiring something different.
Another strong argument by the contractor was that there had been three contract modifications prior to the government changing its contract interpretation. These modifications lowered the ceiling heights in several areas. For each of those, the USACE requested and received cost reductions for the reduction in the higher level finishing and painting that was saved by lowering the ceilings.
If Level 4 was required for all surfaces regardless of the height of the exposed wall then such a cost reduction change order would not have been appropriate. The Board stated, “These modifications evidence ASACE’s initial understanding that Level 4 finish was not required above ceilings and below floors.”
The Board goes on to state that the government’s interpretation of the specifications was also within the zone of reasonableness. But that didn’t get the government off the hook here. This is because where both the government interpretation and the contractor interpretation are reasonable, this just proves the specification was ambiguous. As a matter of law, the Board determined that the ambiguity was “latent” and not “patent.” And, “If the ambiguity is not patent, but latent, we construe it against the drafter under the rule of contra proferentem.” The ambiguous specification must therefore be interpreted and applied against USACE.
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 ConstructionRisk 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. 21, No. 8 (Sep 2019).
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