Undefinitized Contracts - Turner Construction Co. v. Smithsonian Institution

Construction and Procurement Law News, Q3 2017

Firm Alert

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The Civilian Board of Contracts Appeals (“CBCA”), the federal administrative court tasked to resolve disputes between government contractors and federal civilian executive agencies, recently issued a decision in Turner Construction Co. v. Smithsonian Institution, addressing how a board should respond if the contracting parties cannot agree to a firm price for an undefinitized contract that a contractor fully performs. Turner Construction Company (“Turner”) filed three appeals from the contracting officer’s decisions after the Smithsonian Institution (“Smithsonian”) failed to pay for additional costs arising from the design and construction of a long-term, multiple-phase project known as the “Public Space Renewal Project” at the National Museum of American History.

The case was unique because Turner and the Smithsonian were supposed to have negotiated a firm fixed price contract during the design phase of the contract, but the parties failed to do so. This failure meant that the Smithsonian could not rely on “many of the safeguards and defenses that would have been available to it under a firm fixed-price agreement,” including the contract’s equitable adjustment clause. Instead, the CBCA agreed with Turner and concluded that Turner was entitled to recover in quantum meruit. The Board’s task, then, was to definitize the undefinitized portion of the contract after extensive evidentiary hearings.

Ordinarily, in quantum meruit cases, one values the services rendered based on the reasonable value of those services in the marketplace. In this case, Turner argued that because there was no “marketplace” for the complex design-build renovations that Turner provided at the museum, the Board should award Turner its reasonable costs plus overhead and profit. The Board agreed with Turner and clarified that under this approach it was not “equitably adjusting” the contract price, but was instead “finalizing the price of the base contract work.” Hence the contract Equitable Adjustment clause or a contractual agreement to limit general conditions and fee on changes did not bind the Board. Ultimately, the Board awarded Turner and its subcontractors over six million dollars.

The Board also rejected the Smithsonian’s claim for overpayment. After Turner submitted its claim to the Smithsonian, the Smithsonian conducted an audit and alleged that it had overpaid Turner by approximately forty million dollars. The Smithsonian, relying in part on document requirements for cost-type contracts, argued that Turner could not produce documentation adequate to support its costs. The Board disagreed and reiterated that the contract was not awarded as a cost-type contract (even though, as it turned out, the parties never agreed on a firm fixed-price), and that Turner was not required to maintain the level of documentation sought by the Smithsonian, including time and materials tickets for change order work.

This case presented a unique set of circumstances because of the parties’ inability to reach a firm fixed-price as contemplated by the contract when awarded. The CBCA’s decision that quantum meruit was the appropriate measure of recovery for Turner will serve as a reference because it allowed Turner its reasonable costs plus overhead and profit, where reasonable costs were not based on the marketplace costs. Bradley construction lawyers in its Washington DC office represented Turner in this case.