Requests for Equitable Adjustment and Impact Claims: A Contractor’s Rights to Recover Under Either Mechanism
Most participants in the construction industry generally understand that a Request for Equitable Adjustment (“REA”) or an “Impact Claim” are similar mechanisms by which a contractor seeks to obtain additional compensation for inefficient labor or other costs more commonly known as “extended general conditions” which are otherwise not available pursuant to a lump sum or other fixed-price construction contract. The REA is normally presented under specific circumstances and usually in accordance with express provisions within a construction contract with a public entity, such as a municipal, state or, in many cases, a federal governmental authority. Indeed, REAs are referenced within numerous sections of the Federal Acquisition Regulations (“FAR”), which governs the performance and administration of nearly all contracts entered into by the federal government.
Conversely, an Impact Claim is a device not necessarily provided for in a contract but can be utilized by contractors on almost any type of construction project, from modest residential renovations to multi-million dollar commercial developments involving both private and public entities. An Impact Claim (which is, for all practical purposes, merely another term for the REA), arises when, during the course of a project, there is a certain magnitude of owner-generated modifications to the original contracted for scope of work, unforeseen field conditions and/or other types of project delays beyond the contractor’s control which simply were not, or could not reasonably have been, contemplated at the time the original contract was entered into.
Therefore, the contractor who seeks additional compensation under its contract as a result of unforeseen substantially adverse impacts to the contractor’s performance on a particular project (such as extended general conditions costs, inefficiencies of labor productivity resulting from having to perform work “out of sequence” or otherwise due to unforeseen circumstances or conditions on the project beyond the contractor’s control), must first understand what risks for such impact(s) it may have assumed pursuant to its contract with the Owner.
Defining a Request for Equitable Adjustment
Firstly, an REA has been generally defined as follows:
A Request for Equitable Adjustment, in government contracting, is a request normally initiated by the contractor for a price adjustment pursuant to a changes clause within the body of the contract. The REA seeks generally to compensate the contractor’s expense incurred due to actions of the government or, in the case of an REA initiated by the public authority, to compensate the government reductions in the contracted for scope of work. An REA generally includes an allowance for profit. Indeed change clauses that provide for adjustments, excluding profit, are not considered “equitable adjustments”, but rather a more generic form of change order or other conventional contract modification.
As set forth in Ralph L. Jones, Co. v. United States, 33 Fed. Cl. 327, 331-332 (Fed. Cl. 1995):
“the ultimate goal of an equitable adjustment is to do equity; to achieve equity, the government contractor seeking an equitable adjustment bears the essential burden of establishing the fundamental facts of liability, causation, and resultant injury. It must show that the increased costs arose from work which was materially different from that contemplated by the parties. The increased costs must be the direct and necessary result of the changes. An equitable adjustment is determined by whether the work was foreseeable based on the information before the contractor at the time of the contract. ‘Foreseeability’ in this instance refers to work that reasonably could be anticipated based on the contemplation of the parties. The question is whether the work would be a foreseeable consequence of those matters the parties ‘considered with continued attention, regarded thoughtfully, or viewed . . . as provable or as an . . . intention’”
Furthermore, while REAs are most often utilized by contractors on projects with the federal government, REAs are also recognized as appropriate vehicles for contractors to seek additional compensation for cost impacts due to project delays or other unforeseen conditions which occurred during the course of public improvement projects, unless the particular contract specifically prohibits the submission of an REA. One example of an unforeseen condition which may justify an REA is the project owner’s issuance of a substantial number of COs which, in the aggregate, constitute a term of art known as a “cardinal change” to the overall scope of work originally contemplated in the parties’ contract.
Seeking a Request for Equitable Adjustment
A contractor seeking an REA from a New York governmental authority by reason of numerous COs issued by a governmental authority pursuant to a public improvement contract was addressed in Perini Corp v. City of New York, 18 F. Supp. 2d 287 (S.D.N.Y. 1998). Although the Court in Perini ultimately demised the contractor’s REA on the basis of having not complied with strict notice requirements to pursue the REA pursuant to the terms of the underlying contract between the parties, Perini and other legal authorities cited to by Perini court stand for the general principle that an REA can be pursued by a contractor to obtain additional compensation for the issuance by the public project owner of a substantial number (or substantial monetary magnitude) of change orders and/or other unforeseen circumstances which constitute a “cardinal change” to the nature of the scope of work initially contemplated by the parties under the contract. In such an instance, the REA is a mechanism to achieve “equity” for the contractor where the contract provisions itself fails to provide an equitable result, as justice requires.
The road map to successfully prosecute on “Impact Claim” under New York law is generally presented by the New York Court of Appeals decision in Corrino-Civetta Construction Corp. v. City of New York, et al., 67 N.Y. 2d 297, 502 N.Y.S. 2d 681 (1986). Corrino-Civetta, despite being decided 30 years ago, is essentially the standard by which an Impact Claim may be pursued on a project located in New York (unless the governing contract provides for its terms to be governed by the laws of a different state). To summarize, the Court of Appeals in Corrino-Civetta held that, even where a contract contains a “no damages for delay” clause, a contractor may nevertheless recover on an “Impact Claim” if the project delays or other circumstances upon which the claim are based were not “reasonably forseeable” at the time the original contract was entered into. To be frank, this is a high threshold for the contractor to meet, and, in many instances, the contractor may have negotiated away its rights to pursue an Impact Claim by entering into one or more change orders during the course of the project which, in essence, release the Owner from such a claim in consideration for the additional monies and/or time extension granted to the Contractor within such change order(s). Nevertheless, Impact Claims remain a viable vehicle to equitably adjust a contractor’s compensation when it has suffered substantial financial harm in performing a project as a result of one or more events or other circumstances which could not have been reasonably contemplated to take place during the course of the project when the original contract was entered into. In addition, Impact Claims appear to be better received and upheld, at least in part, if the parties’ contractual disputes are submitted to binding arbitration, which occurs quite often in the construction industry.