Commercial Item Contracts and Constructive Changes: When Your Shield Becomes Their Sword

Commercial vendors who might otherwise be unwilling to take on the regulatory burdens of federal procurement have nevertheless been attracted to Federal contracting by the protections offered by Federal Acquisition Regulation (FAR) Part 12, relating to Acquisition of Commercial Items.  But, what if the Commercial Item procurement system’s protections have a built-in ambiguity that can be sprung like a trap door?  If you have the Commercial Items Clause FAR 52.212-4 in your contract, there might be some of these hidden traps waiting for you, cloaked in the form of purported contractor protections.  To circumvent these traps, it is important to understand and avoid assumptions about contract changes, and – more specifically – about your potential recovery under the Constructive Changes doctrine.  The big picture message here is that you cannot and should not assume that you will be able to recover damages under the Constructive Changes doctrine if your contract includes FAR 52.212-4(c).  We explain why below.

Constructive Changes Theory under the Changes Clauses

As many of you may know, there are several versions of the Changes clause (see FAR 52.243-1 through 4). Which of these clauses is inserted into a specific contract depends on the nature of that contract.  Under each of these clauses, the government has the power to unilaterally change the terms of the contract.  Once changed, the government can force the contractor to continue performance of the new terms, and compensate the contractor only if the contractor submits a Request for Equitable Adjustment (REA) or claim. 

The downside of these clauses, then, is that the CO has wide discretion to unilaterally order a change to the contract, and that a contractor has to perform – and potentially self-finance – the changed work.  The contractor may only seek recovery on the back-end, through a REA or claim.  At the same time, the upside of these clauses is that the contractor does have a means to seek the additional costs (as well as any time-extensions) arising from a government-ordered unilateral change.  Perhaps most importantly, under these clauses, a contractor may even have a right to seek recovery when a constructive change occurs.  For example, pursuant to FAR 52.243(b), when “direction, instruction, interpretation, or determination…from the Contracting Officer … causes a change” it “shall be treated as a change,” and a contractor may therefore seek compensation the same way that it could had the change been made pursuant to a formal contract modification.  In other words, even if the government does not issue a written contract modification, give a written order, or even characterize something as a “change,” it may (under certain circumstances, and when appropriate notice is given) nonetheless be treated as a “change,” so as to allow the contractor to seek additional time or money on the contract.

REAs and Claims are often premised on this “Constructive Changes” doctrine, and many contractors are very familiar with this concept.  So much so, in fact, that many contractors take for granted that this theory of recovery might always be available to them.  Sadly, this is a dangerous assumption to make, especially for contractors with prime contracts containing the Commercial Items Clause at FAR 52.212-4. 

Commercial Items Contracts, Changes, and the Potential Barrier to Constructive Change Theory

FAR Part 12’s Commercial Item procurement system brokered a bridge between federal buyers and commercial industry, opening up the marketplace by mandating a preference for buying commercial items, and establishing contracting rules that are more in line with industry standards.  Business and government were more equal, with the intent that the four corners of the deal was the entire deal.  This was supposed to make things easier for the contractor.  Along the same lines, certain clauses for these commercial contracts were drafted to include certain contractor protections.  For example, the “changes” provision in the Commercial Item Clause at FAR 52.212-4(c) was drafted to provide explicit protection against unwanted unilateral modifications:

(c) Changes.  Changes in the terms and conditions of this contract may be made only by written agreement of the parties. (emphasis added).

Literally interpreted, and to the relief of commercial businesses requiring this protection before contracting with the US Government, the terms of FAR 52.212-4 Commercial Item contracts can only be changed by written bilateral agreement.  With the advent of this clause, businesses could enter into a contract with federal agencies, knowing that the government could no longer force them to accept government-decreed unilateral changes.

But, what effect does this language have on the Constructive Changes doctrine?  What happens when contract performance changes due to informal government actions, or disagreements arise over the meaning of contract terms which the contractor believes require additional or different work?  Whereas, under the more traditional Changes Clauses discussed above (FAR 52.243-1 through 4), the Constructive Changes doctrine allows contractors to seek recovery for damages arising from such informal changes, FAR 52.212-4(c) appears to offer no such remedy.  Indeed, FAR 52.212-4(c) Commercial Item change clause is not only silent on the doctrine of Constructive Changes and the right to submit REAs or claims for constructive changes, it explicitly states changes are made only by written agreement.  On a conceptual level, this makes it difficult to argue that a “direction, instruction, interpretation, or determination…from the Contracting Officer,” which is not codified in a formal modification, constitutes and should be treated as a “change.”  In turn, that might bar the contractor’s recovery of the costs incurred to perform the changed work.

For those of you dealing with civilian agencies, there is some good news.  The Civilian Board of Contract Appeals (CBCA) seems to have resolved litigation in favor of incorporating the doctrine of Constructive Change into FAR 12 Commercial Item contracts.  In contrast, however, the Armed Services Board of Contract Appeals (ASBCA) has decided Constructive Change cases on a case-by-case basis and has yet to permanently resolve the Commercial Item Constructive Change applicability question.  If anything, the ASBCA cases on the issue strongly imply that contractors may not be able to recover under the theory when their contracts include the Commercial Items clause, though alternate avenues of recovery may be possible.   The contemporaneous written record, created during the changed event and while the contractor is making efforts at obtaining fair resolution, can make all the difference in whether the contractor wins or loses.  This should be an area of concern for defense contractors, especially as the government lately seeks to procure a broader variety of items and services under Commercial Items contracts.  Though the case law has not created a definitive bar to recovery, it has, at a minimum, provided the government with a basis to deny contractor’s REA and claims when asserted under a Constructive Changes theory of recovery.  This may force contractors to proceed with protracted litigation in order to recover damages sought under the Constructive Changes doctrine and to do so with no guarantee that the litigation will ultimately turn out in their favor.  Accordingly, contractors should proceed with caution.

The bottom line on what this means for you?  Commercial Item contractors should not make any assumptions or automatically rely on the doctrine of Constructive Change for recovery of expenses when those expenses were incurred due to acts or omissions by the government that were not part of a formal bilateral contract modification.  If informal changes become an issue, and, in particular, if performing this “changed” work would result in extensive delays or significant costs, contractors would be wise to explore with an attorney, at a very early stage, the other theories of recovery that might offer an alternate – and less uncertain and expensive – path to resolution.  Contractors should consider these issues as a matter of strategy before and during performance, rather than proceeding with work, assuming they can recover their damages at a later point.  In addition, it is critically important for contractors dealing with changes issues to keep good records.  The documentation built during the Constructive Change event could mean the difference between payment and denial of recovery. 

If you are facing a Commercial Item Constructive Change dilemma, and need help, please give Obermayer’s government contracting team a call.


The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.

About the Authors

Maria L. Panichelli

Partner

Maria is a partner and the Chair of the Government Contracting department.   She focuses her practice exclusively on federal government contracting and procurement, guiding her clients throughout the entire lifecycle of their...

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Karen L. Douglas

Of Counsel

Karen provides full-spectrum legal support to prime and subcontract federal government contractors, supporting their bid and proposal efforts, providing protest services, change order responses, requests for equitable adjustments, claims and disputes, audits,...

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