Contractors trapped on a troubled construction project should take note of a recent federal court decision, Kiewit -Turner v. Department of Veterans Affairs, CBCA No. 3450 (Dec. 9, 2014). In the decision, authored by the United States Civilian Board of Contract Appeals (a special court which hears claims brought against agencies of the federal government), a sophisticated construction company was allowed to stop work and abandon a project that was years behind schedule and millions of dollars over budget.
The decision relied on a well-established principle of contract law, the implied “duty of good faith and fair dealing,” to allow Kiewit -Turner—a joint-venture between Kiewit Building Group, one of the largest construction organizations in North America, and Turner Construction Company, a similarly-sized general contractor specializing in the construction of healthcare facilities—to walk away from the much-anticipated, state-of-the-art Veterans Affairs Medical Center campus (VA) in Aurora, Colorado.
Key to the decision was the VA ‘s unwillingness to work with Kiewit-Turner to build the project under tight budget constraints. While Kiewit-Turner at one point estimated it would cost $1.085 billion to construct the project as designed, the VA insisted that Kiewit-Turner complete construction under a budget of only $630 million. When Kiewit-Turner told the VA this was not possible without significant value engineering, the VA apparently agreed and held value engineering sessions to bring project costs under control. However, when it was time to implement changes into the construction documents, the VA wavered on the proposed changes and ultimately did not include them. At the same time, the VA continued to insist that Kiewit-Turner continue work.
The Board of Contract Appeals found that the VA materially breached its contract with Kiewit-Turner by (1) failing to implement its chosen project delivery system in good faith; and (2) by failing to produce a design that could be built at or under budget. By failing to fulfill its end of its contract with Kiewit-Turner, the court held, the VA breached its duty of good faith and fair dealing. The Board of Contract appeals concluded, “[T]he agency drove up the costs of construction,” by refusing to implement changes that members of their own agency believed were necessary to bring project costs under control. “The agency never came close to providing a design that could be constructed under budget.”
The decision could reverberate across the country as contractors may point to similar mismanagement, neglect, and/or intransigence on the part of the owner as a reason to stop work. Kiewit -Turner v. Department of Veterans Affairs represents another important and effective tool to ensure construction participants are treated fairly on a construction project.
The implied duty of good faith and fair dealing may also become particularly important. Especially on projects using unconventional delivery systems—like integrated design and construct (IDc) or design build—the duty of good faith and fair dealing should be on the forefront of the minds of contractors and owners alike. Where the owner’s input and guidance is needed throughout construction to ensure a successful project, it is clear the owner must provide that input and guidance in good faith. The law requires both the contractor and the owner “not only to avoid actions that unreasonably cause delay or hindrance to contract performance, but also to do whatever is necessary to enable the other party to perform.”
For now, construction of the VA project in Colorado continues under new management.