Insight from Hindsight; Issue 2

It’s a Termination! What Now?

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A termination is an extraordinary event and immediately declares the contract physically complete. Professional contract managers will be prepared for such eventualities and will have a plan in place to attack the issues and resolve the many lingering situations.

Imagine that you arrive at your desk after a long drawn-out meeting only to find the following notice from your friendly contracting officer:

Dated today

Your Corporation
Anyplace, Anystate 12345

Your Contract No.123-ABD-C-00456 is completely terminated under the “Termination for Convenience” clause effective immediately. Immediately stop all work, terminate subcontracts, and place no further orders except to the extent that you or a subcontractor wish to retain and continue for your own account any work-in-process or other materials. Transmit similar instructions to all subcontractors and suppliers. Detailed instructions follow.

“Terminated?” you think. “They have been pushing us to accelerate deliveries. We have over 100 people involved in this project and more than a dozen subcontractors. They can’t do this to us! Can they?” The simple answer is yes. The U.S. government reserves for itself the right to stop performance on any contract that it determines is no longer needed. This is reflected in the “termination” clause included in your contract, and it is always in your contract. The right of the government to terminate is such a well-established principle of government contract law that the courts have held that even if the clause is completely omitted from your contract, it will be read into the contract anyway. So yes, it is always in your contract.

The more important issue for you, however, is what do you do now? This is not one of those messages you can sit on over the weekend or deal with tomorrow. This notice requires immediate action on your part to minimize any further costs against this project. You may not be able to stop everything with a single phone call, and certain aspects of the work might need to continue for purposes of safety or preservation of property, but as a general rule you want to get the word out to as many people as possible as quickly as possible, along with instructions on what they should do next.

A termination is considered an extraordinary contract action. It has no parallel in commercial law unless you consider a breach of contract “normal.” This clause gives the government the right to cease performance of any contract and minimize the further impact to government funds. If you fail to assist them in minimizing these costs, there is a very real possibility that you may end up being unable to recover some of these costs. Unnecessary losses, whether accruing to the government or your company, are inexcusable, so whatever you do, you better do it right now and it better be the most reasonable thing you can do.

By reserving the right to terminate contracts without any prior notice, the government recognizes that this is extraordinary and does not typically hold contractors hostage over these issues. The Federal Acquisition Regulation (FAR) specifically notes that it is important to be fair to contractors in these situations and that rigid compliance with the cost principles may not serve that purpose. Still, a contractor who does not cooperate and work diligently to minimize continuing costs may be in for a surprise at termination settlement negotiations.

So what should you do? First and foremost, you need to alert your management team and the project manager. Simultaneously, you need to have accounting open new charge numbers to accumulate the costs for the termination from this point forward. You also need to spread the word so that people who have been charging to the project know to start using the new charge numbers immediately. This is also important because, depending on your accounting system, there are some costs that might typically be covered in your overhead pools that will now become direct charges. Some usual examples are your internal subcontracting staff, the prime contracting staff, legal, and possibly accounting, property management, and certain manufacturing functions. The reason for this is the extraordinary nature of the government action. Wrapping up a significant project can tap into the use of these overhead functions more so than was planned, and suddenly you have a smaller base against which to charge these indirect costs. So it is generally a good idea to charge everything related to the termination directly to those new accounts. Your overhead pools might otherwise get distorted and you might not be successful in recovering those costs on your other contracts.

The next thing you should do is alert all of your subcontractors and exercise the “termination” clause you so wisely placed in their subcontracts. This clause is not one of the mandatory flow-down clauses and some companies miss the importance of it when they structure their boilerplate subcontract agreements. This is a serious oversight. As already mentioned, a termination like this has no counterpart in commercial law. It is treated like a breach of contract and can entitle the subcontractor to recover costs you will not be entitled to claim in your termination proposal to the government. For example, in commercial breach actions, the goal is to put the contractor in the same position it would have been if the contract was fully performed. This means, among other things, that they should be paid the full profit they would have made on the entire contract. These are called “anticipatory profits.” This is not a category of cost that you will get from the government, so failing to include a proper termination clause in your subcontracts can expose your liability, for which you might not recover.

The next thing you will need to do is to coordinate the accumulation of all data, including cost data, related to the project. The government will expect you to alert them to current funding levels and the expected need for further funding through the termination process. The regulations give you a full year to submit your proposal with an option to extend that if the contracting officer feels there is good cause to do so. For cost type contracts you can continue to voucher those costs for only six months, and for fixed-price contracts you are not entitled to any payments until the claim is settled. While there are a few exceptions for this practice under fixed-price contracts, it is clear that the sooner you can get your termination claim submitted and negotiated, the better for everyone.

Your Responsibilities

Among the things you will be responsible for coordinating are the following:

• Determining if any of the work needs to continue because it has commercial value to your company;
• Determining if work should continue on work-in-progress due to safety concerns, to avoid damage to equipment, to avoid spoilage to items with commercial value, or to avoid any undue loss to the government;
• Documenting your file with all of the details of the notice and the actions you took in response thereto;
• Notifying all of your subcontractors and instructing them to notify their subcontractors to the lowest tier;
• Collecting all property inventories;
• Discussing with the contracting officer any funding needs;
• Alerting the contracting officer of any pending or threatened litigation, or any litigation arising throughout the settlement process;
• Identifying and informing the contracting officer of all completed items;
• Providing disclosure of and copies of all patents and related intellectual property matters to the contracting officer;
• Determining the number of employees that will be affected and what must be done to comply with the Workers Adjustment and Retraining Notification Act (WARN Act); and
• Preparing the final termination settlement proposal.

Each of these is discussed below. You must also acknowledge receipt of the notice from the contracting officer. Just like every other contract, it eventually becomes physically complete and must move into a closeout phase. A termination has the effect of immediately declaring a contract physically complete. Thus, the remainder of the process closely parallels a normal closeout process.

Commercially Useful

If any of the product, whether complete or work-in-progress, has commercial value for your company, you can request that it be released to you. You may have to refund any portion of the work that has been billed to the government, but one overriding policy with terminations is to avoid waste and spoilage whenever possible. The regulations even caution contracting officers that if the work is mostly complete, let the contract run to its normal completion and dispose of the product via surplus sale. That will be far cheaper than engaging in the termination process. This will involve careful accounting on your part and a senior-level decision on whether to forego the sale of the product and work-in-progress to the government under the termination process. Unless you have an immediate sales opportunity, or the product is of a standard commercial type, it may or may not make sense to add it to your inventory. There are often variances, even with commercial items, that have been made to meet a government purpose that makes the items unsuitable for standard commercial use. This is purely a business decision on the part of you and your company’s management. It tends to be non-reversible, so make the decision quickly and stand by it.

Safety, Damage, and Spoilage

The government does not want to lose whatever salvageable benefit there might be in the work-in-progress. Clearly, if a significant test is in progress, or a heat or vacuum treatment is in process, you do not typically just turn off the switch. An assessment must be made of the work-in-progress and what stage of completion it might reach with minimal effort. This is not something you can decide on your own, however. Your assessment must be discussed with the contracting officer and government contracting officer technical representatives and their decision will control. Obviously, production lines cannot easily be stopped and restarted, so this is a very early conversation that must be held to mitigate costs while giving the government the option of continuing.

Documenting Your Files

Every contract manager should understand the importance of complete file documentation. In terminations, it is not unusual for the contract to be turned over to completely new people on both sides of the agreement. Some agencies maintain contracting officers specially trained in terminations and even refer to them as “termination contracting officers.” People will often be quickly reassigned or released from employment, so the importance of thorough and complete file documentation is readily apparent. This should be a routine practice for all contract managers, but we have all inherited files that were less than complete and understand the problems this can cause. In a termination, one common outcome of incomplete file documentation is an inability to support certain costs and thus suffering the loss of the business being terminated and an overall loss on the effort. Write it down. Put it in the file. Keep copious notes and follow up with the contracting officer on all decisions made and agreed to.

Notifying subcontractors and dealing with the issues unique to them will be discussed in more detail in the second part of this article, which will appear in the August 2011 issue of Contract Management. For present purposes, it is important that you provide the termination notice to each of them and document your files of the date, time, manner, and points of contact in your contract file.

Property Inventories

One of the early deadlines in a termination is the identification and release of the property. If there is a need elsewhere in the government, the sooner that is known and the property transferred the less expense is occasioned to the government. Full inventories must be prepared and transmitted within 120 days of the termination. This facilitates future use of the property, including any that has been provided to the subcontractors, and avoids potential storage costs that would be allowable if a contractor is required to retain the property. High attention should be given to this activity and property specialists should be brought in to manage the effort. The schedules are detailed and with the revised FAR Part 45 now rather ubiquitous, each contractor will have its own system for managing property. All government-owned property, whether government-furnished property or contractor-acquired property, must be reported.

Any items that have been completed but not yet accepted by the government might also be included here. If the government has paid the costs, the property is theirs. Closing inventory will either fall into completed items or work-in-progress items and will need to be dispositioned. Alert the contracting officer of any such items and follow his or her instructions.

Funding and Litigation

Under a cost-type contract termination, vouchering of costs will continue for no more than six months. Within that time, the bulk of the costs should have been realized and contractors should not be in a financial bind. This might not be true for small businesses, especially those who have a significant portion of their total work terminated. Equally true, many small businesses only have fixed-price contracts, so the vouchering option is not open to them. Discussions should be held with the contracting officer on total funding needs and any pending or newly initiated litigation. If the termination happens toward the end of the fiscal year, the government might need the funds currently on your contract and seek to de-obligate them quickly. You will need to have your facts and data well prepared to prevent an excess de-obligation. You will need to work with your finance and accounting team, as well as legal, to assess whether there are any contingent liabilities attributable to this contract. Reserves must be maintained for any pending litigation and other contingent liabilities. If the government has not done its homework regarding the complete status of the program, it can result that the termination becomes more expensive than continuing the program. This is not a pleasant surprise to a contracting officer, so having all of your information readily available for this assessment is critical.

Intellectual Property

Just like a normal closeout, the intellectual property—including inventions—created during performance, software developed or licensed, and all of the other myriad items covered in FAR Part 27 must be accounted for and dispositioned in accordance with the contracting officer’s instructions. If your company is such a size that it has intellectual property counsel, they should be brought into the process (and direct charged to the termination as discussed above). Otherwise, the contract manager will be responsible for making sure this matter is fully documented and reported to the contracting officer. Final patent reports, releases, licenses, and other intellectual property documents should be maintained in a related file for proper closeout and disposition. If your contract contains any of the Defense FAR Supplement (DFARS) clauses, there will likely be even greater reporting and record-keeping requirements.

Employees

In many terminations, this is the biggest and most sensitive issue. You may need to keep some critical skills on the terminated project, yet those are the very people who are most likely to be immediately captured for other projects. You have to balance the needs of the terminated program against the needs of ongoing programs and the employees’ best interests. This is a very difficult challenge. If the employees are relatively easily redeployed in your company, or if the terminated contract is small, for example, this task is simpler. It becomes more complicated if you employ more than 50 employees and will be laying off a significant percentage of your total employment. The WARN Act requires that when certain levels of layoffs will occur, numerous notifications must be provided and the affected employees are entitled to either a lengthy notice of up to 60 days or pay in lieu thereof. This can quickly escalate the costs of the termination. The intricacies of the WARN Act are beyond the scope of this article, and many contracting officers are not aware of the impact of this law on their terminated programs, making the assessment of the total cost of compliance a high-priority task. If the termination notice was a complete surprise, there are arguments supporting the use of an exception in the law that permits shorter notice periods. If, however, the layoffs were foreseeable, then the full notice must be given. Is a slow-down in the level of contracting dollars to be expended by the federal government foreseeable? Arguably, yes. The real issue is whether your project could reasonably anticipate its demise. And therein lays the complexity of this analysis.

Most contracting officers recognize that these are legitimate costs in a termination of any magnitude, but bring your legal, human resources, and financial folks together to assess this very technical, emotional, and personal aspect of a large-scale termination. It can have a dramatic effect on the total cost of the termination settlement and your ability to recover these costs.

Settlement Proposal

Settlement proposals are typically prepared on the inventory basis, meaning that a full cost accounting of everything completed or in process is identified and the costs identified accordingly. With contracting officer permission, there is a possibility of a total cost claim, but this is the exception and involves many assumptions that can distort the actual settlement. The preparation of a termination settlement proposal is often as complex and labor intensive as the competitive proposal for a major program. Since a termination is generally a surprise, you may not have the resources available to manage this effort. The costs of the settlement proposal are allowable under the termination, so, if needed, get whatever outside help you might require to promptly close out your subcontracts and get your settlement proposal in to the government as quickly as possible.

Preparation

What should be apparent is that a termination is a quick-moving contract action that, even if partial, is totally disruptive to the project. The time to get prepared for a termination is long before it occurs. After receipt of the notice, too many things are happening too quickly to treat this as your training period. So what can you do to prepare?

As a professional contract manager, you should be aware of the basic tenets of FAR Part 49. Take some time to read it. It includes specific form language that easily translates into checklists. Make sure that your company policies are up to date and that everyone who is in a position to learn of a termination or potential termination is trained to recognize the signs and symptoms of a troubled program. Set up a list of frequently asked questions about terminations on your website, and just as the government has specially trained termination contracting officers, it might be prudent to designate one member of your team as the termination focal point. Terminations are an excellent topic for brown-bag meetings or monthly NCMA events.

FAR Part 52, likewise, contains the various termination clauses. Read them. Understand their differences. Compare them to your contract and verify that the correct clause is contained in your contract. If not, request a modification. Keep your termination briefing material current. When the notice arrives, you will need to notify, and train, your finance lead, your program lead, your senior management, and the employees who are affected. Thus, your human resources department also needs to be in this loop. You will not have the time or luxury of taking a week to put these materials together or train your people. Post-termination mischarging due to inadequate notice to those charging to the program only complicates the termination settlement proposal. Your supply chain personnel will also need immediate information. It is wise to have a person in that department as a designated point of contact for terminations as most of your suppliers will not have the depth or breadth of knowledge about the subject as you do. More about this topic will be explored in next month’s issue of Contract Management.

Too often contract managers figure there will be plenty of time “later” to catch up on the record-keeping on a contract. Failure to keep your files current and well documented will become a major impediment to a quick and comprehensive settlement proposal. While this message is mentioned often, it continues to be a problem: keep your files up to date! Once a termination is issued, everything that was your “normal” suddenly isn’t. There will not be enough time to do what you should have already done and also manage the termination process. This is the single most common problem in termination settlement proposals, and poorly documented claims do not settle for 100 cents on the dollar. This means that you will lose money solely due to your poor file maintenance. This should never happen.

Another critical area to explore is whether you have adequately accounted for your “potential termination liability.” According to the “limitation of funds” and “limitation of costs” clauses, the contractor is required to reserve from the available funds a sufficient amount to cover the costs of a termination. Despite this contractual requirement, too many programs run the funds to zero before they are replenished. Both the government and the contractors are complicit in this mismanagement. Occasionally, contractors even begin spending their own funds, over and above whatever funding the government has provided for contract performance. Some companies even have written policies on how to facilitate this because it is so common. This is a very bad practice contractually. By the terms of the contract, and in accordance with the Anti-Deficiency Act, it is possible that no further funding will be made available and the total cost of the termination will fall on the contractor. At best it will lead to protracted dispute litigation that becomes very expensive for both parties. Clearly, the better practice is to follow the terms of the contract and the applicable clauses and reserve from the current funding enough funds to cover your potential termination liability. It is a requirement of the contract and it is just good business. Verify that your accounting system includes this reserve and that it is frequently reviewed by your management team to ensure it reflects current program needs.

Default Terminations

This article is focused on terminations for convenience, and the principles apply for the most part to terminations for default on a cost-type contract. The applicable clause in cost-type arrangements is simply called “Terminations” and applies for either default or convenience. Default terminations are far more serious since you will not be paid for a termination settlement proposal and you might possibly not get paid at all for items and services not delivered or nonconforming items and services that were. If your program is in serious trouble, you should know it. If a delivery deadline is going to be missed, or if you are in noncompliance with any term or condition of your contract, you should be in regular contact with your contracting officer. Default terminations should never be a surprise. The best defense is to perform the work to the best of your ability and actively manage the contract. The second best defense is to develop a good working relationship with your contracting officer and keep him or her completely informed—even if the news is bad. A good relationship will do more to make a bad situation better than most anything else. If the termination for default is later deemed inappropriate, it will be turned into a convenience termination and you will recover all of the costs discussed here. So you should implement all of the same practices as if it were a termination for convenience. Getting to the point where a termination for default is converted to a termination for convenience may take several years as the disputes process unfolds, and that is not the time to begin thinking about what the termination costs were several years previously.

Conclusion

A termination is an extraordinary event and immediately declares the contract physically complete. The process of wrapping up a program that may have been proceeding at full strength is a difficult and challenging activity. It requires quick action and rapid decision-making. Many people can be affected, and generally it is not in a positive way. Emotions and costs can run high. Professional contract managers will be prepared for such eventualities and will have a plan in place to attack the issues and resolve the many lingering situations. Their people will be trained and aware of the process, accounting will be well documented, and the contract files will fully support the ultimate termination settlement proposals. For the unprepared, a termination will become a significant low point in their careers. 

Conflicting Contract Clauses Can Cause Catastrophe

By Ben Patrick, Esq. of Watt, Tieder, Hoffar & Fitzgerald

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In Florida, pay-if-paid clauses that shift the risk of the owner non-payment from the prime contractor to the subcontractors are enforceable.  In International Engineering Services, Inc. v. Scherer Const. & Engineering of Cent. Florida, LLC, 74 So.3d 531 (Fla. 5^th DCA 2011), the court considered a subcontract that contained a clear and enforceable pay-if-paid clause.  However, the subcontract also contained another standard clause: a flow-down provision that incorporated the terms of the prime contract into the subcontract.  The prime contract provided that the owner was not obligated to make final payment to the prime contractor until the prime contractor had fully paid all of its subcontractors.  This created a classic Catch-22 scenario: no subcontractor was entitled to be paid until the prime contractor was paid, but the prime contractor was not entitled to be paid until all subcontractors were paid.  The Florida Court of Appeal held that this created an ambiguity that was sufficient to render the pay-if-paid clause unenforceable.

An identical result was reached by the Missouri Court of Appeals in MECO Systems, Inc. v. Dancing Bear Entertainment, Inc. 42 S.W.3d 794 (2001).  There, the prime contract was an American Institute of Architects (AIA) standard form, and required the prime contract to certify, with each payment application, that all subcontractors had been paid.  In the absence of such a certification, the prime contractor was not entitled to payment.  As with the Florida court, Missouri’s Court of Appeals found that the conflicting provisions in the prime contract, which were incorporated into the subcontract, rendered the subcontract’s pay-if-paid clause ambiguous and unenforceable.

It is fair to consider these opinions as yet another manifestation of judicial hostility towards pay-if-paid clauses.  Certainly, contractors can expect the courts to look for ways to invalidate such clauses, even in states like Florida that are relatively generous with freedom of contract considerations.  The opinions also demonstrate the importance of adapting subcontract language where necessary to conform with the prime contract.  In these cases, it is clear that no one in the prime contractor’s office sat down with a copy of the prime contract and noted its payment procedures before they entered into their “standard form” subcontracts.  As a result, the prime contractors set up a Catch-22 that, ultimately, they were penalized for.

These opinions also highlight the importance of carefully drafted order of precedence clauses in subcontracts.  It is an open question whether the Florida Court of Appeal would have reached the same conclusion if the subcontract had a clause that simply stated “Whenever the terms of this Subcontract are inconsistent with any term of the Prime Contract, the terms of this Subcontract shall prevail and take precedence over the terms of the Prime Contract.”  In such a circumstance, the Florida Court of Appeal would have had to think long and hard about how to use a term from the prime contract to make the subcontract ambiguous and invalidate the pay-if-paid clause.

The subcontracts in MECO Systems contained order of precedence clauses that provided that the subcontract governed over any inconsistent terms in the prime contract.  The Missouri Court of Appeals rejected the prime contractor’s argument that this order of precedence clause resolved any ambiguity caused by the prime contract.  The court noted that the prime contract had its own order of precedence clause, which provided that “If anything in the other Contract Documents is inconsistent with this Agreement, this Agreement shall govern.”  The court found that, because the subcontract’s flow-down provisions incorporated the prime contract’s order of precedence clause, the subcontract remained ambiguous despite having its own order of precedence clause because of the two order of precedence clauses were in conflict.

The problem with the Missouri court’s analysis is that the AIA standard form prime contract defines the term “Contract Documents,” and the definition does not include subcontracts.  Ergo, the prime contract’s order of precedence clause has no application to the subcontract.  It is unclear from the court’s opinion whether this issue was ever brought to the court’s attention, and the opinion discloses that there were substantial deficiencies in the briefs submitted by the prime contractor during the appeal.  It may be that a subcontractual order of precedence clause that expressly states that it takes precedence over the prime contract’s order of precedence clause would be effective to resolve this ambiguity.  It may also be that in Missouri, subcontracts should exclude the prime contract’s order of precedence clause from the flow-down provision.

Delay and Disruption Analysis on Technology-Driven Projects

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Experience and Proven Techniques Provide Causal Links between Impacts and Financial Damages

From defense contractors and software developers to systems integrators and government agencies, stakeholders in technology-driven projects frequently find themselves in contract disputes resulting from unanticipated impacts and delays. Analytical techniques proven on complex construction and engineering disputes, combined with software development and systems integration experience, enable Navigant’s team of analysts and experts to assist a wide variety of clients and their legal counsel with the preparation and defense of complex claims. 

Disputes related to large complex projects require a detailed understanding of what actually happened during the project, particularly the events underlying the disputed issues, to develop of a successful legal strategy and maximize financial recovery.  The experienced analyst gains this understanding by mining through the contemporaneous reporting, metrics, correspondence, etc. and applying practical experience and sound judgment to fully understand the root causes of the issues. 

The ability to analyze complex technical and financial data, along with typical project documentation such as job cost reports, correspondence, and progress reports, provides valuable observations and insights often overlooked by other consultants and analysts.  Our analysts rely on broad project management experience, including hands-on expertise with modern project management tools and techniques, to analyze and synthesize information such as:

• Earned Value Metrics - CPI and SPI Indices
• Productivity Metrics (SLOCs per hour, etc.) and Forecasting
• Software Defect Discovery and Burn-Down Metrics
• Risk Analyses and Simulations
• Estimate at Completion (EAC) Analyses
• Scope Changes and Time Impact Analyses
• Critical Path Schedules, Updates and Forecasts
• Resource Planning, Loading, and Leveling

Detailed analyses provide the basis for quantification of impacts and create a fact-based causal link between discrete impacts and identified cost overruns

 Armed with a complete factual background and deep understanding of the data, the team conducts interviews of key project personnel to help coordinate entitlement issues with discrete requests for financial damages. Navigant then performs detailed fact-based comparisons of what actually happened to what was planned, accounting for the impacts and delays imposed by all parties. For example, technology projects may experience significant cost overruns due to unanticipated impacts to productivity. Loss of productivity and ineffi­ciency claims can be difficult to prepare and defend because the met­rics for productivity are somewhat subjective and often not diligently maintained. In these cases, our team studies the specifics of the particular impacted work ac­tivities to develop meaningful analyses that accurately measure the impacts to productivity.  The team’s experience allows them to analyze the detailed estimates, the contractual requirements, and the original schedules to determine what was planned.  Then, a comparison of this detailed “as-planned” data to the “as-built” data and actual processes derived from the project documentation isolates the unanticipated issues. (See Example #1 below)  This type of focused analysis provides the basis for identification and quantification of impacts and creates the fact-based causal link between discrete impacts and identified cost overruns.

Effective presentations allow non-technical audiences to clearly understand complex issues
Navigant’s expert reports and presentations include clear and concise graphics that summarize the project and primary disputed issues, providing the hearer of fact with a fundamental understand­ing of the issues and a roadmap to the claim. Our analysts and experts have worked closely with our graphic artists for years.  Together, the team has the unique ability to simplify the complex and tailor the details of the presentation to the targeted audience.

Additionally, our reports and presentations help clarify the key technical issues and synthesize complicated fact witness testimony. In complex cases, this can be especially effective as the technical nature of the work makes it dif­ficult to translate testimony into a persuasive presentation of damages.

Testimony establishes factual support for damage calculations
During the dispute resolution process, we are often asked to provide expert testimony relative to our analyses and findings.  Whether the venue is a formal courtroom or an alternative dispute resolution setting, these opportunities allow our experienced testifiers to further strengthen the links between the contemporaneous impacts and the increased cost of the work. Effective expert testimony also helps assimilate often disjointed fact witness testimony into cohesive support of the impacts and delays as they ultimately relate to financial damages. 

Experience and fact-based analyses help counsel develop legal strategies and a roadmap to financial recovery
Navigant’s experience and proven fact-based analyses help clients and their counsel develop overall strategies for the preparation or defense of complex claims. Detailed analyses of specific issues and work activities provide a deep understanding of technical issues and provide a factual basis for the quantification of impacts and inefficiencies.

Clear and concise reports, combined with compelling presentations and expert testimony, provide a strong link between unanticipated impacts and discrete requests for financial damages. The Navigant team’s experience and proven techniques help optimize legal strategies and the recovery of financial damages in complex technology-driven disputes.

Representative Case Examples

Example #1 - Communication Data Link System
On a Space and Naval Warfare Systems Command (SPAWAR) program, the contractor was to provide full-scale design, development, testing, production, integration and deployment of a specialized communication data link system (CDLS) for military assets. The program included hardware, software, integration and extensive testing.  Late changes to the design by the government extended the development phase of the program and impacted the planned production sequencing and deployment. A detailed schedule analysis established the causal link between the changes the government requested during late-stage testing and the extension of software development activities.  Navigant’s analysis and expert report provided a summary of the complex software and systems integration aspects of the program.  The detailed analysis quantified the scope growth and the efficiency caused by the requested changes.  The overall delay to the program and the associated financial damages were set forth in the detailed report.

The top section of the graphic to the right summarizes the schedule analysis, while the middle section provides a chronology of the late changes.  The bottom section of the chart provides the link between the late changes and the contractor’s impacted manpower production.  The contractor was successful in recovering damages for delay, disruption and inefficiencies.

Example #2 – Statewide Information Technology (IT) Outsourcing Program
A contractor was to provide necessary labor and equipment to modernize the IT infrastructure and services of a large group of State agencies. The contract called for, among other things, the completion of the design and implementation of a new network linking the various agencies and the implementation of an enterprise messaging system.  The program was delayed by over a year.  A detailed schedule analysis identified the critical path of the program and hundreds of agency-caused impacts that restricted the progress of the contractor on both critical path and non-critical path activities.  A detailed impact and productivity analysis determined that the contractor was due a time extension as a result of the delay and damages in excess of $700M resulting from inefficiencies and additional work.  Navigant’s analysis identified the discrete tasks and time periods that were impacted and provided the roadmap to the damages calculations.  Prior to litigation, the contractor reached a favorable settlement with the State.

About the Author

Clay Ryals is a Director in Navigant’s Global Construction Practice and is based in Atlanta, Georgia.  Mr. Ryals provides expert analysis and testimony, as well as project advisory services, for complex construction, manufacturing, software, and systems integration projects and programs.  He has been designated as testifying expert on a number of cases, authored expert reports, and provided expert testimony in state court and multiple Alternative Dispute Resolution proceedings. Prior to joining Navigant, Mr. Ryals was Vice-President of A.W. Hutchison and Associates. He holds degrees in Industrial Management and Building Construction from the Georgia Institute of Technology

Avoiding the Perfect Storm:Hospital Building Project Delays Come with Inevitable Conditions

By William W. Heun, AIA, Matthei & Colin Associates

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An untold numbers of large projects have been cancelled or delayed due to the economic uncertainties of our times; however delays and cancellations have always been a part of the construction business.  There just seem to be more of them now.  Large projects, especially politically sensitive ones have been put on the shelf and resurrected ever since man started building.  This article will deal with how to manage the delay, and resurrect the project efficiently?  What is special and different about a large hospital project that is brought back to active status after several years of delay?

There are some issues that cannot be avoided and must be faced at the outset.  First, a hospital is a very dynamic business.  During a long delay there will be new businesses formed, new services offered to the community, new policies and modified care models.  Second, once a project is put on hold, you cannot get the lost time back, it is gone forever.   Third, costs will escalate.  This article will describe logic, procedures and philosophies that will help you respond to the inevitable.   A 510,000sf community hospital that was completed in December 2010 will serve as an example for this article. After a four year delay for CON and court challenges we were allowed to begin construction.  We will share what we got right and what will be done differently next time.  

Challenges
This regional medical center project was in a holding pattern for four years.  During that time several new businesses were created, including a hospital based Wound Care Center with 4 hyperbaric chambers, an infusion center, a Level II Special Care Neonatal Nursery, and enhanced cardiac intervention facilities.  We also accommodated new methods of care delivery that had profound implications to space and infrastructure needs, including changes to medications delivery and barcoding systems, enhanced Workstations on Wheels (WOWs), the continuing transition to en electronic medical record, and the ever evolving IT and IS systems.   Throughout the holding period we met periodically with administration and key managers to assess potential impacts such changes might have on the project.  If the impact was such that the construction documents required alteration, the architects and engineers were directed to make the necessary changes. 

When a project is delayed for a long period of time codes and standards will change.  During the delay of this project the building department adopted the new International Building Code (IBC).  This new code had a marked impact on the structural design with vastly increased seismic requirements.  As might be expected there were also changes to the Minimum Guidelines and several other care standards. 

We applied for the building permit and paid the plan review fees.  We then kept the building department informed of the changes we were making.  This effort had several positive outcomes.   The project was always ready to start immediately.  The building department was treated as a team member and when the project restarted, they were on board with the project and eager to get going.  The hospital community was kept engaged with the process.  This helped keep morale up.  

Any large project should have tangible benefits attached to its completion.  Increased revenues, improved patient safety, operational efficiencies, etc.  In some cases financing costs ramp up at some point and there are no added revenues or savings to cover them.  A prolonged delay means these benefits are not achieved.  Once you have lost the time you cannot get it back, but you can accelerate the construction process to minimize the impact. 

The Construction Documents and permit application were kept up to date so that we could be ready to go right away, but this wasn’t all.  The Construction Manager was kept in the loop so scheduling and cost impacts could be managed.  More importantly, we kept the financing documents up to date.  Once we had a clear CON, Zoning legal challenges dispensed with and a comfort order from the bond guarantors we were in the market within a very short time.  The final cost numbers were approved in the amended CON in January 2008, Bonds were sold and construction started in February.  Thirty four months later we were closing the old hospital and treating patients in the new one. 

Acceleration during construction is the only way to recoup any of the lost time.  Be ready to restart at the drop of a hat.  Assemble a design and construction team that are flexible and focused on the outcome, not self protection.  There were several site and construction conditions that could have pushed the schedule out further.  The project theme was no extra time.  Finish ahead of schedule. 

Because of the way the bond issue was structured and the way Maryland reimbursement is arranged, each day after December 14th, 2011 was worth $50,000 in unreimbursed interest expense.  This $50,000 per day does not factor in lost business or opportunity or construction general conditions.  Lost opportunity, lower volumes and added general conditions adds another $15,000 to 25,000 per day.  The contracts for construction and design and engineering were structured without bonus or penalty.  The contracts for construction management were fashioned to provide little incentive to claim extras.  This empowered the design and construction team to apply our time and effort to solving problems and finding new and better work sequences to reduce the schedule. 

There were changes and extras but the work was authorized to go forward as the pricing and sequencing were being negotiated.  The time saved by treating changes in this expedited fashion saved 7 months of construction time worth over $10,000,000 in interest cost alone.

We employed several practical policies that yielded tangible results to keep the construction schedule moving forward.

1. Address issues immediately.  Quick resolution prevents anyone from claiming damage and delay.
2. Prompt payment to contractors kept our project at the front of their priorities.  When we needed more men or material to keep on track we got it.  
3. The construction manager reviewed all the Owner’s purchase orders for equipment to ensure that infrastructure, installation and rigging was covered.
4. Ensure that on site project management time is include in OR and imaging systems purchases.  We were able to trouble shoot all the installation, access and rigging issues for all of our major equipment.  This made the install without surprise. 
5. Create a fund for overtime work.  This fund was used to accelerate portions of work that would allow acceleration of the work whenever it could be identified. 

Conclusions
We learned several important lessons from the very long delay of this project and our responses to that delay.  Perhaps first and foremost is that keeping morale up during delay and then during the construction is very difficult, but vitally important.  You must keep the community at large and the health system employees engaged and working toward the belief that it will go forward.  If you lose belief the wind goes out of the sails very quickly.

Remain flexible during the delay and then during construction.  There will be changes to operations, staff, codes and technology.  How you respond to the changes and pressures will determine the success of the project. 

Once the cause of the delay is dealt with, proceed as quickly as possible.  Time is money and momentum has value. 

Lastly, keep a sense of humor and perspective.  These projects are too important to allow them to fail.  

Collecting and Analyzing iPads: What You Need to Know

By Cuyler Robinson, Navigant

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A corporate chief operating officer (COO) is on an evening flight, coming home after a long day of board meetings. She decides to get some work done. Instead of firing up a laptop, she slides out an iPad. For the next hour, bathed in a soft LED glow, she taps away, drafting memos and sending email.

Two days later, an attorney is dispatched to interview the COO. A legal hold notice is about to be issued. The attorney receives instructions to work with a forensic expert to obtain a copy of the data on the COO’s electronic devices. The attorney’s instructions state: “collect and preserve data on any device used to draft or transmit documents to prevent a claim for spoliation.”
During the interview, the attorney learns that the COO has a laptop, which is no big deal, but the iPad can turn a routine custodian interview into a challenging assignment.

Tablets Are the New Laptop
iPads may contain unique and potentially discovery-relevant business documents. They are lightweight and mobile, turn on fast, and provide a range of document-drafting options. Business travelers on a flight or employees headed to a meeting may prefer to grab their iPad and leave the company laptop behind for these reasons. If a company is one of the increasing number that has a BYOD (Bring Your Own Device) IT policy, it might not even know which employees have iPads.

Because of their potential for storing relevant documents and emails, iPads can end up in the crosshairs of document collections. Despite their sleek appearance and easy-to-use interface, however, an iPad is challenging to forensically preserve and analyze.

iPad Versions and Forensic Support
The tablet computer market is new, and the iPad is the most successful tablet computer of all time. The first iPad was sold in March 2010. The iPad 2 was released in April 2011, and the iPad 3 was released in March 2012. Apple and its shareholders enjoy the impact that an annual release pattern has on sales figures, but keeping up with each new device can be challenging for those tasked with collecting iPad data.

iPads are complex devices that differ from traditional desktop or laptop computers, which are easily disassembled for forensic preservation. Apple has secured the device in ways that complicate the forensic imaging process. The iPad itself is sealed shut, preventing access to its internal storage media. The only way to connect to the device without damaging it is via the proprietary cable supplied by Apple. Specialized software and carefully followed procedures must be used to forensically capture as much of the iPad’s data as possible.

Apple tends to build hype for new product releases by creating an aura of mystery and maintaining as much secrecy about those new releases as possible. Consumers, analysts, and vendors are kept in the dark about specifics on the new device or software updates. As the release date approaches, rumors will swirl, but few people actually have access to a prototype to examine and test, which only aggravates the forensic collection issue. Each new release brings new settings and features, and forensic software vendors must scramble to add support. Because of this, it’s a constant race to catch up, and the lag in support can span many months. The iPad 2, for example, has been out for nearly a year, and most forensic software vendors still do not support a complete physical (bit-for-bit) forensic capture of data from the device; only select data can be captured. Also, because the iPad is a mobile device that could be lost in a cab, an airport, or a hotel, Apple engineers have appropriately secured the device to prevent unauthorized access. Further, as iPads are designed to store copyrighted music or video, Apple intentionally prevents wholesale copying of data in an unauthorized fashion. All of these security efforts, however, are at odds with a forensic expert’s goal of capturing all data stored on the device.

Passcodes and Backup Passcodes
The most common security setting is the iPad passcode, which unlocks the device. One should expect all iPads to have a passcode, especially if the iPad is used to connect to a company email system. The forensic expert will need the current passcode to image the iPad; therefore, if you believe iPads will need to be collected by your forensic consultant, request that all users also provide their passcodes.

What if you do not have the passcode? For the original iPad, a forensic examiner can still recover data, but the process is complex. The only way to unlock the current iPad, other than entering the passcode, is to reset the iPad to its original factory settings, and then restore documents from a backup if such a backup is available and was properly made using Apple’s iTunes software. It’s important to note that even with this process, you will never know exactly what was on the iPad before it was reset and restored. Therefore—without a doubt—it’s best to obtain the iPad’s current passcode, and if the passcode isn’t available, talk to an expert about alternative options.

There are other iPad settings that can inhibit the forensic capture of potentially relevant data. For example, an employee may be encouraged to back up his or her iPad data using Apple’s iTunes software. Because these backups may contain sensitive data, the company may require that all iPad backups be encrypted. When the encrypted backup setting is enabled on the iPad, it forces the employee to create a new backup password (different from the passcode). Current forensic software requires disabling the encrypted backup setting, which cannot be removed without the backup password. So, for some iPads, forensic experts may need both the passcode and the backup password before they can capture data stored on the device. Expect to jump through security hoops if you do not have access to the iPad’s passcode and the backup password.

Apps, Apps, and More Apps
iPad functionality is driven by the applications, or “apps,” that have been installed on it. There are a number of popular business and productivity apps for the iPad. These apps allow for document editing, note-taking, and email communications, and each one may store documents in a different manner. The installed apps must be evaluated to determine if they contain documents of interest. For instance, there are many different apps that can be used to view, edit, and create business documents, and the documents stored within these apps may need to be reviewed separately. Also, while certain entertainment-related apps—such as Amazon’s Kindle app or Netflix’s movie-streaming app—are easily identified and most likely free of documents of interest, there are hundreds of apps that could be installed that may store business data in some fashion. Be sure to talk with your forensic consultant about the types of data for which you’re looking so that they can examine the apps on the iPad and determine whether data of interest could have been generated by these applications.

The “Magic” iCloud
The iCloud is a recent feature addition to the Apple line of products that also complicates the document-collection process. When enabled, the iCloud automatically synchronizes documents—including email, contacts, music, and photos—to all other linked Apple devices. To an iPad owner, the iCloud may seem like magic—an image that Apple has worked hard to create. It may not be clear to employees where this iCloud feature has transferred their documents. In reality, the data is also stored on Apple’s servers “in the cloud,” which currently provides 5 GB of storage for free. If an employee uses this feature, then the number of devices that must be preserved may be multiplied. If additional data stores are a concern for your matter, you may want an expert to examine the iCloud settings to identify any other locations in play and assist with collecting those additional documents.

Recommendations for iPad Discovery

• Compile a list of all devices that may contain relevant documents sooner rather than later. The middle of a litigation crisis is not the time to run around trying to find out who got an iPad for the holidays that is now being used to read and create business documents.
• Speak with a forensic expert to understand the options available for capturing data from the various iPad models that may be encountered. 
• Be sure to obtain the employee’s iPad passcode and backup password, especially when an employee returns a company-issued iPad before leaving the company, as these are needed to image the device.
• Understand that it may be necessary to review the individual apps installed on the iPad to evaluate whether an app contains relevant documents. 
• Be sure to check if iCloud is enabled on the iPad and seek assistance as needed to determine if documents have been synchronized to other Apple devices.

While we cannot cover every situation in this article—especially because the iPad and its apps are continually evolving—with some advanced planning in hand, your company will be on the way to meeting the challenges posed by the need to preserve and collect data from iPads.

Ten Mistakes Owners Make that Cause Disputes

By James G. Zack, Navigant

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After nearly four decades as a contracting officer, construction manager, construction claims consultant, I have concluded that owners routinely make a number of mistakes on projects that actually cause disputes.  These are the following.

1. Solving contractor problems – Owners want projects completed on time and in budget.  When the contractor encounters problems on the jobsite owners want resolution – now.  When contractors appear to be dragging their feet over a problem, owners often step in and direct a solution.  If the problem was truly the contractor’s problem, not something caused by the owner, the directed solution may make the owner liable.  In this case owners voluntarily make the contractor’s problem their own.  Should this happen the owner may owe compensation and time to implement the solution.  If a contractor poses a problem not of the owner’s making, owners should provide suggestions, not direction.
2. Proceeding with variations before time and cost are agreed upon – When a need for a variation arises, owners may feel pressured to proceed before the time and cost of the variation is negotiated.  By authorizing the contractor to proceed with the work before agreement on time and cost is reached, the owner’s negotiating position evaporates.  When instructed variations (known in North America as force account or time and material changes)  are issued, the owner is at risk for the time and cost of the variation – regardless of how much higher these are than the owner thought at the outset.  Owners are better advised to negotiate prospectively priced variation orders.  Owners can learn the total time and cost impact before the work is underway and reach a business decision on whether the variation is worth the impact.
   
   
3. Failing to agree on the cost of variations on a daily basis when instructed variations are employed – When instructed variation directives are issued by the owner, many do not demand that the contractor provide a daily record of labor, equipment, materials, etc.  Failure to obtain a daily record of the variation work may lead to higher costs.  Failure to obtain and review the daily record of variations denies the owner the opportunity to check on mitigation of damages.  When an instructed variation directive is issued, one of the terms should be that the contractor shall provide a detailed daily record of the work involved in the variation to the owner.
4. Not understanding the contract – Owners frequently modify standard form contract documents but fail to train their own staff in the meaning and intent of the revised terms and conditions.  The owner’s staff may be left with a poor understanding of what is in the contract and the intent of various clauses.  When questions are raised by the contractor about various sections of the contract, they may provide inaccurate responses which later develop into disputes.  To avoid this situation, owners must train their staff about the contract – its contents and intent.  If they know the contract and can explain it to contractors correctly, there is less likelihood of a dispute arising.
5. Using Requests for Information and contract interpretations to correct errors or redesign the project – Drawings and specifications sometimes require variations to correct errors.  Other times, owners decide to make other variations to the plans.  In either case, the contractor is typically owed additional cost and/or an extension of time.  At times, however, owners or design professionals attempt to use interpretations or responses to Requests for Information to direct variations to the work at the expense of the contractor.  Should a scope of work need to be revised to overcome an error in the original documents or to provide for a variation the owner wants then owners must acknowledge their responsibility and instruct, or preferably agree upon a variation order with the contractor.
6. Objecting to written notices – Owners include numerous notice provisions in contract documents.  Such requirements are intended to benefit the owner by bringing to their attention events and actions that may have potential impact to the time and cost of the project.  Notwithstanding the clear benefit of written notices, many owners object when contractors file notices of time and cost impact.  Some owners actively attempt to discourage contractors from submitting written notices despite the clear requirements of the contract.  To avoid disputes concerning lack of timely written notice owners should discuss notice requirements with the contractor and encourage them to submit written notices whenever called for in the contract and then take action.
   
   
7. Requiring contractors to finance project variations – Construction is usually done on a cost reimbursement basis in that the contractor first spends their money to perform the work and only then can request payment for the work installed.  Owners occasionally attempt to take advantage of their cash flow control position when faced with very large variations.  Owners may direct the contractor to proceed on an instructed variation basis knowing full well that the variation will take much time to be installed.  As instructed variations are sometimes not paid until work measured by the owner’s Quantity Surveyor, this has the effect of requiring the contractor to finance the owner’s variations.  When an owner determines a need for a large variation, the easiest way to avoid a dispute over the financing of a variation is to negotiate and execute a prospectively priced variation order.  Once executed, the variation order can be added as a pay item to the schedule of values and the contractor can seek payment routinely as the variation work is installed.
8. Refusing to deal with extensions of time in a timely manner – The majority of variations do not delay the outcome of the project, but some will.  Owners may fear settling extensions of time when variations are ordered, especially if the variation is issued early in the project.  Owners say “What if I grant an extension of time now and it turns out the contractor really doesn’t need it at the end of the project?”  As a result of this doubt, owners may refuse to deal with extensions of time preferring to wait until later in the project “when the contractor really needs the time.”  As a result, contractors struggle to reserve their rights to delay and impact claims, planting the seeds for a dispute.  They argue the owner breached their agreement by not administering the contract properly; they may accelerate work to protect themselves against liquidated damages; they argue that time is now at large and they are only obligated to deliver the project “within a reasonable time”; etc.  All can lead to a dispute at the end of the project.  And, all are avoidable.  If the owner adheres to the terms of their contract and grants extensions of time when impacts to the end date of the work are demonstrated.
9. Refusing to deal with indirect costs when variation orders are issued – As with the extension of time issue, many owners refuse to deal with the impact of variations.  These are typically soft cost claims – lost productivity, extended field costs, etc.  It is well known that multiple variations can cause indirect costs far in excess of direct costs.  Indirect cost claims often arise at the end of the work because the owner refused to deal with them earlier.  At the end of the work, however, the contractor may be pursuing decreased profit margin in addition to cumulative impact, mixing the two together in hopes that the owner cannot disaggregate the costs.  The way to avoid end of job claims is to work with the contractor when a variation order is being negotiated to determine what impacts are likely to result.  Negotiate a reasonable cost for the indirect costs and include it in the variation order.
10. Failing to settle variation orders “full and final” – Many contractors seek to hedge their bets during the work by reserving their rights to delay and cumulative impact until the end of the project.  And, owners allow this.  At the end of the project it is likely that some element of decreased margin will be included in the cumulative impact claim.  Owners now are arguing over what impact was caused by variations and how much of claim is simply trying to recover for other problems unrelated to the variations.  To avoid this situation, owners should negotiate the full time and cost of each variation order including indirect costs, preferably prior to work being performed in the field, and then include waiver language precluding the contractor from resurrecting settled variations at the end of the project.  (To determine such language, a knowledgeable construction barrister should be consulted.)

Construction projects are fertile field of endeavor, ripe for disputes.  There are many parties involved in a construction project and the opportunity for things to go awry is significant.  However, many disputes are self-inflicted.  Owners who make one or more of the mistakes above invite such disputes.  Each is avoidable if the owner adheres to the terms of their contract, deals with the contractor fairly, and proactively addresses issues as they arise.

About the author:

James G. Zack. Jr. is the Executive Director of the Navigant Construction Forum – the construction industry’s global resource for thought leadership and best practices on avoidance and resolution of construction project disputes globally.  With 40 years experience working on construction projects he is a recognized expert in mitigation, analysis and resolution or defense of construction claims.  Mr. Zack has been involved with claims throughout the United States, Canada, Egypt, China, Germany, Kazakhstan, Saudi Arabia, Tatarstan, The Russian Federation, Saudi Arabia and Trinidad and Tobago. He has been involved in more than 5,000 claims and has been designated as an expert witness in mediation, arbitration and litigation.  Mr. Zack is a Fellow of AACE International and the Royal Institution of Chartered Surveyors (RICS).   He  is a Certified Forensic Claims Consultant, a Certified Construction Manager and a Project Management Professional.  Mr. Zack is a nationally known author, speaker and trainer concerning the management, mitigation and resolution of construction claims on public works projects.