Things go south when subcontractors are not included in government and contractor negotiations. In the recent past, the US Air Force decided to redo a small construction project. However, the main contractor signed the contract without the consultation of the subcontractor. The actual cost increased, and a dispute was filed with the Armed Services Board of Contract Appeals. Tom Temin spoke with Boone Haynes procurement attorney Dan Ramish for more details on the fiasco.

Tom: I think it started when the Air Force changed the ground rules when they decided to do additional work in the form of an alarm system.

Dan: I agree. Optimum Construction, a contractor, was awarded a $2 million project to replace a fire alarm system at Eglin Air Force Base. The Air Force changed the contract, shifting the work hours and sequence, which increased costs for Optimum and its subcontractor, Pugh. Optimum initially negotiated with Pugh and the Air Force to capture the changes but faced pressure from the Air Force to agree to a $200,000 modification or risk contract termination. Optimum accepted the modification without consulting Pugh, leading to significantly reduced costs for the subcontractor. The case ended up before the Armed Services Board of Contract Appeals.

Tom: Right, Optimum Construction wanted $100, 000 whereas the Air Force agreed to 200, 000 and the subcontractor ended up getting $13,000 instead of the original ask of $100 000.

Dan: Yes, Optimum Construction failed to consult with its subcontractor, Pugh, before agreeing to a $200,000 modification. The subcontractor later discovered that the modification did not account for all their costs, as the work was scheduled for nights and required demobilization and remobilization daily, impacting their expenses.

Tom: yes, but Optimum paid whatever extra it could to Pugh. What happened next when Pugh wasn't happy with the new deal?

Dan: After completing the work, Pugh submitted a Request for Equitable Adjustment (REA) to Optimum Construction for additional costs of $90,000, similar to their original proposal. Optimum, however, expressed surprise and skepticism about the subcontractor's claim. As expected, the Air Force rejected the REA, and when Optimum converted it to a claim, the contracting officer also denied it.

Tom: It wasn't over, and an additional dispute was claimed. What did the Armed Services Board of Contract Appeals decide?

Dan: The board concluded that there was no additional constructive change as the subcontractor's concerns were already addressed in a previous modification. They emphasized that Pugh proceeded with the work despite raising the issue with the main contractor. The modification included release language, indicating a settlement for the changes. Optimum's claim of signing the modification under duress was dismissed since the government had the right to terminate the contract for convenience.

Tom: Right, the dispute now becomes between the main and subcontractor because the government got the job done at the price they wanted.

Dan: That’s correct. Main contractors face the challenge of avoiding being caught in the middle when dealing with modifications that affect subcontractors. The main contractor must involve the subcontractor in negotiations to align their interests and secure approval. Failing to obtain subcontractor approval and making disparaging comments can lead to dissatisfaction and potential legal action by the subcontractor against the main.

Tom: So in such situations, the subcontractor should just walk away from the table?

Dan: Well, if the subcontractor had been involved in the decision-making process and given a choice between a lower $200,000 modification or walking away, they might have made a similar decision. However, since they were not engaged during the modification, the main contractor may now be caught in the middle and incur costs that cannot be recovered from the government.

Tom: So what would be your advice to the main contractor if they were your client?

Dan: When dealing with a bilateral modification, it is essential to carefully review and understand its coverage. It may be challenging or even impossible to seek additional compensation for the same work due to the inclusion of a standard release. Therefore, addressing subcontractor costs and schedule upfront is advisable, significantly when the subcontractor raises concerns about inadequate coverage.

Tom: so, no assumptions about the modified terms and additional payments?

Dan: Absolutely correct. The board concluded that the main contractor said it would take about 800 to 900 thousand dollars to get the work done, which eventually was done in $300,000. The gap in this costing and work cost was the basis of the decision against the subcontractor. Therefore, it is better to know the terms and walk away when you can.

Therefore, consultation with an expert is essential before taking up big projects. This rule is religiously followed by United Seattle, so there are next to zero disputes, and suppliers or further subcontractors are not dealt a bad hand.