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Gauge the weight of contract details

Robert J. Sherry

Details, details. Failing to comply with procedural niceties can leave a local government contracting entity holding the bag for claimed contractor costs'even after a meritorious contract termination. In last month's column I discussed how procedural details can make or break a protest of a contract award decision. Here's my promised Details II column.

In a case from Tennessee, an engineering services company contracted with a local municipal government to provide computer design services for a traffic control system on a cost-plus-fixed-fee basis. The contract contained a scope of work for system design services and a cost limitation provision.

The provision carried an estimated cost for the contract and obligated the contractor to use its best efforts to perform the services within that estimate and to notify the government if it concluded at any point that the estimate would be exceeded.

As part of any such notification, the contractor was required to provide a revised estimate, which would then become the new ceiling for cost reimbursement. A separate provision allowed the fixed fee to be paid to the contractor.

The job turned into the proverbial dream kitchen. Technical change orders overwhelmed both parties during performance. The scope of work was based on the assumption that the contractor's mainframe software design would be adequate to operate and maintain the traffic control system.

As the project proceeded, the parties realized that the design would not produce the functionality desired. The contractor redesigned the system and submitted numerous change orders requesting payment for the redesign.

But the city terminated the contract for convenience and refused to pay for the final change order. Officials based their refusal on a technicality: Although the city had said it would approve the payment, it did not formally execute the modification approving the change order.

The court rejected the approach. It reasoned that the government was obligated to pay all the costs incurred by the contractor prior to the termination notice. The court concluded that the government could not hide behind the technicality of a formal change order approval'or lack of one.

Moral: Some details are more important than others. Make sure you monitor how a contractor adheres to notice provisions affecting costs. When feasible, make sure a contractor separates the costs of efforts performed inside the contract scope of work from those performed outside the scope. Forget about the real technicalities'such as a formal sign-off on a payment you have already approved.

Robert J. Sherry is a partner at the law firm McKenna & Cuneo LLP. He heads the government contracts practice in its San Francisco office.

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