The Significant Change in the Character of the Work Clause: Uncertain Federalism In

THE “SIGNIFICANT CHANGE IN THE CHARACTER OF THE WORK” CLAUSE: UNCERTAIN FEDERALISM IN

HIGHWAY CONSTRUCTION CONTRACTS

By James P. Wiezel[*]

I.INTRODUCTION......

II.THE LEGISLATIVE AND ADMINISTRATIVE HISTORY OF THE FEDERAL STANDARDIZED CLAUSES

A.The Congressional Mandate......

B.The Federal Highway Administration Regulations......

III.IMPLEMENTATION OF THE FEDERAL CLAUSE BY THE STATES......

A.Variations Among the States......

B.Problems of Implementation......

IV.RECOMMENDATIONS FOR REVISION OF THE CLAUSE......

V.CONCLUSION......

I.INTRODUCTION

For over twenty years, Federal-aid highway construction contracts entered into by all of the fifty States have been subject to a Federal requirement that the contract include certain standardized contract clauses generally addressing changes in the work.[1] This The Federal requirement that all interstate highway contracts incorporate certain standardized clauses has been implemented by the Federal Highway Administration (FHWA) and the departments of transportation of the various States;,those agencies have which have included the Federal clauses, or State variants thereof, in their published standard specifications for road and bridge construction.[2]

One of the Federal clauses, the differing site conditions clause, is no different from differing site condition clauses commonly used for other types of public works projects.[3] This The differing site condition clause is well-knownwell known to construction industry professionals and construction lawyers, and has been the subject of much case law and commentary.[4] The recognized intent of the differing site conditions clause is to to transfer to the ownerimposeon the owner the monetary risk of the subsurface site conditions that materially differing from those indicated in the contract or ordinarily encountered and generally recognized as inherent in the work provided for in the contract.[5]. TThe effect of the differing site condition clause is, at least in theory, to reduce the overall cost of public works projects by eliminating the need for contractors bidding on such projects to include moneys in their bids by way of contingency toinflate their bids in order to cover the potential costs resulting from the existence of a such differing site conditions.[6]

A second federally required standardized clause is the “significant change in the character of the work" clause.[7] This clause is not common to public works projects, is less well-knownwell known to the construction industry and construction lawyers, and has been the subject of virtually no case law or commentary.[8] The purpose of the “significant change in the character of the work” clause is to provide for the adjustment of unit prices in a Federal-aid highway contract where the owner, by direction, changes the quantities or construction methods required for the work in some material way.[9] Increases and decreases in quantities of unit price items in excess of twenty-five percent are to be presumed to be “significant changes in the character of the work.”[10] The intent of this presumption is to create an additional contract remedy for contractors on unit-price Federal-aid highway projects.[11] Where the quantity variation for a unit price item exceeds the twenty-five percent threshold, the contract price for some or all of the final quantity is to be changed by adjusting the unit price to be multiplied by the final number of units.[12] Whether this additional contract remedy has any overall effect on the cost of Federal-aid highway projects is unknown and open to debate.

Both of these federally required standardized clauses originated in the same Congressional mandate to the Federal Highway Administration.[13] The mandate in each case was to develop standardized contract clauses and require the States to include them in Federal-aid highway projects, unless the States were already implementing comparable clauses under their own statutory authority.[14] As will be seen below, however, the goal of federally enforced standardization has been imperfectly realized. For example, iIn regard to the case of the “significant changes in the character of the work” clause, many States have seen fit to vary the verbiage and substance of the clause from the Federal model.[15] The result is that there is no single “significant change in the character of the work” clause in use on all Federal-aid highway projects.[16] Moreover, the differences in the approaches adopted by the different States are telling;. for various reasons, mMany States have declined to incorporate substantial provisions of the Federal clause.[17] Some States have changed the Federal language to deal with problems of implementation which other States have not recognized.

In addition, as will be seen, the Federal model clause is itself a dubious effort to allocate risks of quantity variations and thereby affect the costs of highway projects.[18] The clause combines a vague standard of “significant changes in character” with a uniform presumption that quantity growth of amount price item beyond a uniform threshold should create a compensable event.[19] Neither of these aspects of the clause is essential to create an efficient allocation of risk or to lower the costs of highway projects as bid, and there are ample reasons to believe they may have the opposite effect in certain cases.[20]

This article addresses the history, justification, implementation and potential economic effects of the FHWA clause and the State variants thereof.[21] Part II of this article provides a summary of the legislative and administrative history of the Federal standardized clauses, including the “significant changes in the character of the work” clause (“SCCW Clause”).[22] As Part II shows, Congress provided very little guidance as to the intended purpose for standardized clauses, and the approach to unit price contract changes adopted by the FHWA finds no express support in the legislative history.[23] Part III of this article provides an overview of how the States have implemented the Federal mandate for a SCCW Clause.[24] Part III shows that States have deviated from the language of the Clause, resulting in less efficient risk allocations and thwarting the goal of contractual uniformity in federally funded transportation construction contracts.[25] Part IV provides a discussion of the shortcomings of the clause from an economic and risk allocation perspective.[26] Part IV recommends, as part of an effort to achieve both efficiency and uniformity in how States implement the SCCW Clause, that the FHWA revise the clause so that it allocates more cost-effectively the risk of material changes in transportation construction contracts with the overall goal of reducing construction costs for the Federal government and the States. [27]

II.THE LEGISLATIVE AND ADMINISTRATIVE HISTORY OF THE FEDERAL STANDARDIZED CLAUSES

The legislative and administrative history of the Federal standardized clauses includes a vague mandate from Congress and a separate administrative agenda implemented by FHWA, leading to agency-generated vagueness and lack of guidance reflected in the Federal model of the SCCW Clause.[28] The States’ response to Congress’ vague mandate response of the States has led to variations from the Federal clause not contemplated by either the Congress or the FHWA.[29] The results undermine the Congressional goal of uniformity and create unpredictable economic effects.[30]

A.The Congressional Mandate

In 1987, Congress passed the Surface Transportation and Uniform Relocation Assistance Act (STURAA), which became law on April 2 of that year.[31] An obscure provision, Section 111(c) of that Act, amended Section 112 of Title 23 of the United States Code to require the Secretary of Transportation to issue regulations, applicable to all Federal-aid highway contracts, requiring the inclusion of a contract clause which "equitably addresses each of the following: (A) sSite conditions; (B) sSuspension of the work ordered by the State (other than a suspension of work caused by the fault of the contractor or by weather); and (C) mMaterial changes in the scope of work specified in the contract."[32] Under Section 112 as amended, a State is required to implement the Federal standardized clause unless the State either (1) had already adopted by statute its own procedure to develop a comparable contract clause or (2) had adopted a statute which does not permit inclusion of such a contract clause.[33]

The Congressional mandate that the Secretary of Transportation “equitably address” items (A) – (C) made clear the intent of standardization but left the desired substance of the regulations largely opaque.[34] To the extent that the legislative history sheds any light at all, it is provided by a single report of the House of Representatives Committee on Public Works and Transportation, concerning a prior version of STURAA.[35] That report stated that the purpose of the provision whichprovision that became Section 111(c) of STURAA was "to address the serious problems stemming from the lack of consistency in general conditions clauses in Federal-aid highway contracts."[36] The House Committee Report specifically addressed what the committee wanted by way of a standard differing site condition clause, which was subsequently implemented by STURAA and the FHWA regulations promulgated under STURAA.[37] Yet the House Committee comments relating to the problem of "material changes in the scope of work" do not reflect any acknowledgement of, much less a focus on, the need for a clause to address adjustments to unit prices.[38] Instead, the House Committee Report focused on the perceived need for a standard clause to provide for payment of lost productivity or "impact" costs.[39] The Report stated: "A change of work may substantially alter the productivity on the entire job. The Committee intends that an equitable adjustment be made in the entire contract price, not just an adjustment for the extra work."[40] Whatever the Committee's intent, it was not spelled out in Section 111(c) of STURAA, which said nothing about a standard clause to address "impact" costs.[41] The vagueness of Section 111(c) affected in turn the regulations promulgated by the FHWA under STURAA.[42]

B.The Federal Highway Administration Regulations

The FHWA published a Notice of Proposed Rulemaking pursuant to STURAA on December 1, 1987 and published a Final Rule on January 30, 1989.[43] The Final Rule amended the FHWA’s regulations to add a new regulation addressing differing site conditions, suspensions of work, and significant changes in the character of the work.[44] The new regulation included specific contract clauses to be made part of, and incorporated into, each highway construction project approved under FHWA’s statutory authority.[45] These included the “significant changes in the character of the work” clause, which provided as follows:

(3)Significant changes in the character of the work.

(i) The engineer reserves the right to make, in writing, at any time during the performance of the work, such changes in quantities and such alterations in the work as are necessary to satisfactorily complete the project. Such changes in quantities and alterations shall not invalidate the contract or release the surety, and the contractor agrees to perform the work as altered.

(ii) If the alterations or changes in quantities significantly change the character of the work under the contract, whether or not changed by any such different quantities or alterations, an adjustment, excluding loss of anticipated profits, will be made to the contract. The basis for the adjustment shall be agreed upon prior to the performance of the work. If a basis cannot be agreed upon, then an adjustment will be made either for or against the contractor in such amount as the engineer may determine to be fair and equitable.

(iii) If the alterations or changes in quantities do not significantly change the character of the work to be performed under the contract, the altered work will be paid for as provided elsewhere in the contract.

(iv) The term "significant change" shall be construed to apply only to the following circumstances: (A) When the character of the work as altered differs materially in kind or nature from that involved or included in the original proposed construction or (B) When a major item of work, as defined elsewhere in the contract, is increased in excess of 125 percent or decreased below 75 percent of the original contract quantity. Any allowance for an increase in quantity shall apply only to that portion in excess of 125 percent of original contract item quantity, or in case of a decrease below 75 percent, to the actual amount of work performed.[46]

Subsection (b) of the regulation made clear that the standardized Federal clauses were not required where a State statute does not permit them, or where a State has implemented its own clause pursuant to a specific State statute requiring such clauses.[47]

In 1991, the FHWA revised the wording of its regulation to add the following italicized insert to subsection (a)(3)(ii):

(ii) if the alterations or changes in quantities significantly change the character of the work under the contract, whether such alterations or changes are in themselves significant changes to the character of the work or by affecting other work cause such other work to become significantly different in character, an adjustment, excluding anticipated profit, will be made to the contract.[48]

The italicized language replaced an original clause whichclause, which read “whether or not changed by any such different quantities or alterations.”[49] By replacing this problematic language, FHWA implicitly recognized that a change in quantities could affect the “character” of other bid items for which the quantities were not changed.[50] Although FHWA’s explanation of the revision made no mention of “impact” costs, the revised language was as close as FHWA ever came to recognizing the possibility of such costs.[51]

What is significant about the Federal verbiage is what is missing;. tThere is no Federal definition of "significant" or "character" and no Federal guidance to the States as to what constitutes a "significant change in character."[52] There is, similarly, no Federal definition of what a "major item of work" is and no Federal guidance to the States.[53] The clause requires an “adjustment to the contract” for significant changes in the character of the work, but provides no guidance as to how to make the adjustment, except to require that it be made before the work is commenced.[54] There is no statement addressing the proper calculation of "impact" costs.[55] The results of the lack of adequate Federal verbiage are seen in the clauses implemented by the various States.[56] B. Because the States have not adopted a uniform version of the SCCW clause, the potential economic effects of the clause, which would be difficult enough to assess if it uniformly applied to all unit price bid items in all federally funded State projects, become even more problematic.[57] Lack of Federal guidance thus not only defeats any goal of creating uniformity, but also undermines any Federal effort to create a clause which positively affects the allocation of risks on federally funded projects to achieve the gcoal of reducing costs.[58]

III.IMPLEMENTATION OF THE FEDERAL CLAUSE BY THE STATES

Despite the requirements of the Federal regulation, the States have not uniformly incorporated the Federal clause into their standard specifications issued for highway construction.[59] A substantial number of States are noncompliant in different ways.[60] Moreover, the different State variations on the Federal clause reflect different State responses to potential deficiencies in the FHWA wording.[61] These divergent approaches result in potential regional variation in the economic effects of the SCCW Clause, and thwart the goal of nationwide uniformity.[62]

A.Variations Among the States

Several States, including Georgia, Hawaii, Kansas, Maine, Maryland, Massachusetts, South Carolina and South Dakota, have declined to incorporate any language referring to "significant changes in the character of the work."[63] Of the States whichStates that purport to incorporate language referring to “significant changes,” one-half have adopted FHWA’s 1991 revised language, while a few States have retained the original FHWA 1989 language.[64] A substantial third group of States have adopted their own “significant changes” language, which is similar to but does not follow either the FHWA 1989 language or the FHWA 1991 language.[65] However, in three key areas, the States have adopted diverging approaches: (1) the standard for determining when a change in quantity is “significant”;[66] (2) the standard for identifying which unit price items are “major” and therefore subject to adjustment;[67] and (3) the remedy for a contractor’s remedy in the event of a quantity change covered by the clause.[68]

Regarding the issue of how large a change in quantities entitles a contractor to compensation, most of the States [JRM1]have retained a provision providing for equitable adjustment of unit prices if quantities are increased or decreased in excess of a certain threshold.[69] However, the States do not apply a uniform approach; . aAlthough the Federal regulation requires a twenty-five percent threshold, Georgia has adopted a twenty percent threshold, Hawaii and North Carolina use a fifteen percent threshold and Ohio uses a five percent threshold.[70] South Dakota and Oregon have no clause providing for any threshold of compensable quantity variation.[71][JRM2]

In addition to specifying how great a change in quantity will justify a price adjustment, the Federal quantity variation clause[JRM3] is intended to apply only "major" unit price items rather than all unit priced items.[72] However, the FHWA[JRM4] did not define what constitutes a “major” unit price item and instead left this choice to the States.[73] Not surprisingly, in the absence of clear federal guidance, the States have adopted no uniform standard as to which unit price items are "major."[74] In Arkansas, Colorado, Delaware, Illinois, Iowa, Kentucky, Louisiana, Maine, Mississippi, Missouri, Nebraska and New Mexico, any unit price item in excess of ten percent of the bid is deemed "major."[75] A “five percent of the bid” threshold is used to define "major" items in Alaska, Florida, Indiana, Kansas, Montana, Nevada, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Wisconsin and Wyoming.[76] A “twenty percent of the bid” standard for "major" items is used in Vermont.[77] Alabama and Georgia expressly exclude certain types of work (e.g., excavation) from the category of “major” items, thus allowing no unit price adjustment based solely on quantity variation of such work.[78]
Other States have adopted more complicated formulas for determining which unit price items are "major."[79] Some States recognize "minor" unit price items and have provided for unit price adjustments for quantity variations in "minor" unit price items beyond a stated threshold.[80]