# AFFARS IG5336.9201-ch7

CHAPTER 7

Construction Contract Management

Section 1 – Contract Requirements

7.1 Introduction. For a construction project to be a success the multi-functional team (contractor, contracting officer and engineer, etc) must work together toward their common goal of a quality end product conforming to the contract requirements. Contracting officers are responsible for assuring the contractor complies with the contract documents and produces the required end product. The contractor is responsible for Quality Control. It is their responsibility to manage, control, and document work to ensure compliance with the contract plans and specifications. As stated in FAR Part 36 and other regulations, contract management of construction contracts is accomplished in accordance with FAR Part 42. However, construction contracts also have unique processes that differ from other types of contracts. This chapter focuses on managing those unique areas:

7.2. Performance and Payment Bonds. The Miller Act (40 U.S.C. Section 3132, requires that construction contracts greater than $30,000, but not greater than $100,000 include payment protections. FAR 28.102-1(b)(1) identifies the types of protection necessary. The Miller Act (40 U.S.C. Section 3131 et seq.) requires performance and payment bonds for construction contracts exceeding $100,000. The conditions under which this requirement can be waived can be found at FAR 28.102-1(a). A bond is a written instrument executed by a bidder or contractor and a second party to assure fulfillment of the principal’s obligations to a third party (AF). If the principal’s obligations are not met, the bond assures fulfillment of the principal’s obligation, to the extent stipulated, to the third party. The applicable clauses are located at FAR 28.103. When using Performance and Payment Bonds consider:

7.2.1. The due date(s) of the payment and performance bonds is identified in the contract (SF 1442). In accordance with FAR 28.102-1(c) the appropriately executed performance and payment bonds are required before starting work.

7.2.2. Upon contract award the SABER and MACC awardees should be required to submit bonds for the “Original Contract Price.” In accordance with FAR 28.102-2(a), “Original Contract Price” means the price payable for the estimated total quantity for requirements contracts, and the price payable for the specified minimum quantity for indefinite-quantity contracts. In accordance with FAR 28.102-2(b) & (d) if the contract price increases, the performance and payment bonds must equal 100% of the increase, therefore, bonding for delivery orders against SABER and MACCs must be:

7.2.2.1. payment and performance bonds obtained for individual orders, or

7.2.2.2. incrementally increased to ensure coverage of all task orders.

7.2.3. FAR 28.106-5 requires that when a contract is modified, a Consent of Surety should be obtained when an additional bond is obtained from other than the original surety. A surety is also required when the modification is for new work beyond the scope of the original contract; or the modification does not change the contract scope but increases or decreases the contract price by more than 25 percent or $50,000. A Consent of Surety is required for a novation agreement.

7.2.4. A Contract Bonds Checklist is available in IG5336.90.

7.3. Insurance When Work is Being Performed on A Government Installation. Certificates of insurance for the prime contractor performing work, or Notification of Compliance with Contract Insurance Requirements should be received prior to the commencement of any work on the Government installation. The prime contractor is responsible for maintaining a copy of all subcontractors’ proofs of insurance, and shall make them available to the Contracting Officer upon request. The insurance certificate must include an endorsement that cancellation is effective as prescribed by the laws of the state; or 30 days after the insurer or the Contractor gives written notice to the Contracting Officer, whichever period is longer.

7.4. Pre-Construction Conference. Although in accordance with FAR 52.236-26 the contracting officer decides if a preconstruction conference is necessary, the contracting officer must give careful consideration to the benefits of the conference prior to determining a conference is not necessary. If the Contracting Officer decides a pre-construction conference is necessary, they must notify the contractor in advance of the conference, and the contractor is required to attend. The notification includes the date, time, location, any need for the attendance of subcontractors, and an agenda. Other interested stakeholders should also be invited to attend. The conference typically includes representatives from safety, fire, security, COR(s), affected building managers, and others that may be impacted by the construction. If a decision is made not to hold a conference, at a minimum, written documentation explaining the items below should be sent to the contractor prior to the commencement of work. The Pre-Performance Conference Checklist Template in IG5336.90 may be used for planning the pre-performance conference. The conference includes:

7.4.1. Review of significant matters of interest in the contract, such as labor standards, payment and performance bonds, insurance, progress payments, authorities related to contractual, administrative and construction responsibilities, and unique contract requirements and/or clauses, e.g. AF Voluntary Protection Program certified sites have additional construction site requirements, http://www.osha.gov/dcsp/vpp/index.html and requirements to use green products.

7.4.2. Review of requirements for the contractor to post information such as the wage determinations, and the poster from US Department of Labor Poster, Form WH-1321, Notice to Employees Working on Federal and Federally Financed Construction Projects in an area easily accessible by employees.

7.4.3. Review of requirements for the contractor to submit information to the contracting officer, e.g. Accident Prevention Plans (52.236-13), Schedules for Construction Contracts (52.236-15), a Voluntary Protection Program Safety and Health Management Plan, Hazardous Materials Reporting, etc.

7.4.4. It is recommended that all bonds or alternative payment protection, including any necessary reinsurance agreements, be received prior to the CO issuing a notice to proceed with the work or the contractor being allowed to start work.

7.5. Materials and Workmanship. FAR 52.236-5 identifies the quality of equipment, material, and articles used for a project, and the quality of workmanship required during performance. Submittal requirements originate from the specifications. It is the responsibility of the contractor to convey submittal requirements to the sub-contractors, suppliers, and vendors. Quality Assurance personnel recommend approval of the submittals, and the Contracting Officer is responsible for approval the submittal. The AF IMT 3000, Material Approval Submittal may be used to meet construction and article approval requirements.

7.5.1 The specifications should

7.5.1.1. identify the items to be transmitted, e.g. shop drawings, product data, manufacturer’s certificates, design data and calculations, manufacturer’s instructions, manufacturer’s field service reports, sample, and operation and maintenance manuals (timing, quantity, content and form).

7.5.1.2. identify who is authorized to approve submittals.

7.5.1.3. establish and specify the review time for submittals.

7.5.1.4. require separate submittal for each specification section requiring submittals. Where multiple sections relate to the same system or element and are being provided from the same source, a single combined submittal is acceptable.

7.5.1.5. require the contractor to identify variations from requirements of contract documents. State product and system limitations which may adversely affect the work.

7.5.1.6. require the marking or showing dimensions and values in the same units as specified.

7.5.2. The submittal register is an internal listing of required submittals for the project and is used by the Air Force as a reference document. The contractor is responsible for providing all submittals required by the specifications and/or drawings. The contractor and Project Engineer should review the register to ensure all submittals are identified. The contract will identify the submittals and the due dates they must be submitted to the CO. The Project Engineer updates the submittal receipt, and recommends approval. The CO updates the submittal register to reflect the status of the submittals, approved, disapproved, resubmitted, and annotates the date the register was returned to the contractor, etc.

7.5.3. The AF IMT 3000 Approval process. Upon review, the contracting officer returns the AF IMT 3000 and submittals to the contractor. The IMT indicates the action taken:

7.5.3.1. Approved. The part of the work covered by the submittal may proceed provided it complies with the requirements of the contract documents. Final acceptance will depend upon that compliance. The term “Approved” shall only indicate that there is no exception taken to the submittals.

7.5.3.2. Disapproved. Do not proceed with the part of the work covered by the submittal including purchasing, fabricating, and delivering. The contracting officer should identify the number of days the contractor has to resubmit on the AF IMT 3000.

7.6. Labor Compliance Requirements. Chapter 6 of this Guide addresses labor compliance requirements.

7.7. Warranties. In accordance with the FAR 52.246-21, Warranty of Construction, the contractor is required to warrant that all work performed conforms to the contract requirements and is free from any defect in equipment, material, or design furnished, or workmanship performed by the contractor or any subcontractor or any supplier at any tier. If possession of any part of the work occurs, prior to final acceptance, the warranty continues one year from the date of possession. FAR 52.246-21 requires the Contracting Officer to notify the contractor, in writing, within a reasonable time after the discovery of any failure, defect, or damage. If the contractor fails to remedy any failure, defect, or damage within a reasonable time after receipt of the notice, the Government has the right to replace, repair, or otherwise remedy the failure, defect or damage at the contractor’s expense. The contractor is required to supply all standard commercial warranties, and enforce the warranties for the benefit of the government, if requested.

CHAPTER 7

Construction Contract Management

Section 2 – Contract Oversight and Management

7.8. Monitoring Progress. In accordance with FAR 36.515, for projects exceeding the simplified acquisition threshold and greater than 60 days, the contractor must submit a progress schedule to the contracting officer.

7.8.1. The AF IMT 3064, Progress Schedules may be used. Contracting Officers should review the schedule for the following:

7.8.1.1. reflects dates representing significant events throughout the project such as commencement, substantial completion, and final completion.

7.8.1.2. identifies major events associated with the project, to include coordination of the project work with others, acquiring materials, plant, and equipment.

7.8.1.3. provides a progress chart of each phase of construction and occupancy.

7.8.1.4. contains enough information to support progress payments

7.8.1.5. provides enough detail to support delay analysis, if applicable

7.8.2. The contracting officer determines if a revised schedule is appropriate when time extensions are approved.

7.8.3. Progress Reports and Schedules. The AF IMT 3065 may be used to maintain a record of contract progress. Reports are received from both the contractor and the inspector, usually on a weekly basis, with a calculation of the percentage of each element of work completion, and the cumulative percentage of the work completed to date. This information is used for computing progress payments, and for monitoring the progress against the stated progress on the contractor’s schedule.

7.8.4. The contractor shall perform the work of the project in accordance with the sequences shown in the approved schedule or give timely notice and identify the need to deviate from the planned work sequence.

7.8.5. In accordance with FAR 52.236-1, the contractor identifies the percentage of work they will perform on the site, with its own organization.

7.9. Quality Management. Obtaining quality construction is a combined responsibility of the construction contractor and government personnel. The mutual goal must be a quality end product conforming to the contract requirements. The following construction clauses aid in insuring the government receives a quality product.

7.9.1. Specifications and Drawings for Construction. FAR 52.236-21 requires the contractor to keep specifications and drawings on site. The contractor is responsible for coordinating, reviewing and approving shop drawings prior to submittal. The CO approves or disapproves the drawings; however, approval does not relieve the contractor of responsibility for conformance. Variations from contract requirements must be identified; approval of variations may include a deductive modification after discussions with the contractor.

7.9.2. Material and Workmanship. FAR 52.236-5 requires that all materials and articles incorporated into the project shall be new and the most suitable grade for the purpose intended. Paragraph 7.5 above provides further detail.

7.9.3. A Construction Quality Management System allows the Government and the Contractor to plan and schedule work for the project by defining various phases for controlling quality during the life of the project. Although every construction project must have a quality management program, the program is designed based upon the cost and complexity of the construction project. The three phases of a well defined Construction Quality Management System are identified below:

7.9.3.1. Preparatory Phase. This phase applies to pre-construction activities—those actions that are performed before any physical work begins. Types of preparatory actions include physical checks of onsite material and equipment for contract compliance, and approval of shop drawings, test reports, and mix designs. It is the responsibility of government personnel to make sure the contractor has satisfied all preparatory requirements before beginning construction. A preparatory phase conference for each definable feature of work is a method that will assist government personnel in meeting that objective. This conference should occur before any construction activity begins.

7.9.3.2. Initial Phase. The initial phase occurs at the beginning of the construction project and is intended to get the actual work properly underway. It is workmanship oriented, and is the point in the process where workmanship standards are established. The safety program and risk assessments associated with the project are also addressed in this phase. For example contractors working on sites that have been certified as Voluntary Protection Program (VPP) will be required to meet the enhanced construction standards for those sites. The local safety office is responsible for establishing the standards for performance at VPP sites. This phase is of such importance that if the contractor should, at any time, change the onsite supervisor an initial phase conference should be scheduled to ensure all parties have a clear understanding of the required workmanship standards.

7.9.3.3. Follow-Up Phase. The follow-up phase is a continuous action throughout the construction project. Follow-up involves routine checks to ensure that previously established guidelines are being followed. If preceded by thorough Preparatory and Initial Phases, this phase is more effective and productive.

7.9.4. Quality Control Plan (QCP). The contractor’s QCP is the foundation upon which quality work is based. The complexity, criticality and dollar value of the project should be considered when determining if a plan is required. When required, the QCP is received, reviewed and formally accepted by the Contracting Officer before any construction begins. The plan should be comprehensive, detailed and logical if the contractor’s quality control program is to be effective. The plan must demonstrate that the contractor has fully considered the specific contract requirements and special factors peculiar to the project. If changes to the plan are necessary, the changes must be made before the plan can be accepted. The Government reserves the right to require necessary changes in the plan and in contractor operations to obtain the specified level of quality. If the contractor wants to make changes during construction the Government must be notified in writing, and the changes accepted by the Contracting Officer, prior to the contractor implementing the changes. The Quality Control Plan identifies:

7.9.4.1. the contractor’s Quality Control organization. The contractor should provide sufficient quality control personnel to satisfy all contract requirements during any given time.

7.9.4.2. the qualifications of individual quality control personnel. The name, classification and qualifications of each member of the contractor’s quality control team must be submitted, together with assigned individual duties, responsibilities and authorities.

7.9.4.3. assigned quality control activities for performance by the prime contractor, subcontractor(s), off-site fabricators, and suppliers. If the contractor delegates certain responsibilities, the plan must indicate how the effectiveness of the quality control efforts of the subcontractor(s), off-site fabricators, or suppliers will be assured.

7.9.4.4. who will perform specific tests and their qualifications if technicians will be performing the tests? Specifics relative to test report submissions should be addressed, including guidelines on format, content and consistency of all documentation to be submitted to the Government. The plan should contain procedures to be followed in giving advance notice to the Government of the times when special tests will be conducted.

7.9.5. a single point of contact for quality control. The plan should contain a letter of direction to the contractor’s quality control point of contact, specifying duties, responsibilities and authorities. A responsible officer of the contractor’s firm should sign this letter that designates authority.

7.10. Value Engineering Change Proposals (VECP). There are times when contractors find less expensive ways to perform work than the methods called for in the contract documents. Since most contract changes that reduce the cost of performance have a potential to lead to a reduction in the contractor’s total profit, contractors must be incentivized to propose such changes. The Value Engineering Clause at FAR 52.248-3 provides this incentive by allowing the contractor to share in the savings. However, value engineering sharing does not apply to incentive-type construction contracts.

7.10.1. Savings. There are two types of savings for which a contractor can be compensated; instant savings and collateral savings.

7.10.1.1. Instant savings represent the contract cost reduction realized by adopting the contractor’s proposal, less the cost of development and implementation of the new method. This clause gives the government 45% instant savings on fixed price contracts and 75% on cost-reimbursement contracts.

7.10.1.2. The second type of savings is collateral savings. This represents the Government’s reduced cost of future operations as a result of adopting the proposed change. The contractor’s share of collateral savings is 20% of the estimated annual savings, not to exceed the contract price or $100,000, whichever is greater.

7.10.2. Value Engineering Clause Application. This clause applies to changes to the specifications that the contractor makes to save the government money. The changes must be directly tied to changes in the specifications, or apply to work that was originally specified as part of the contract.

7.10.3. Instructions for the preparing a VECP are identified in the clause at FAR 52.248-3(c).

7.10.4. VECP Submission. In accordance with FAR 52.248-3(d) the contractor submits the VECP to the Resident Engineer at the worksite, with a copy to the Contracting Officer.

7.10.5. Government Action. The contracting officer will provide status on the VECP within 45 calendar days after receiving their copy of the VECP. If delays occur in processing the VECP, the CO shall notify the contractor within the 45 day period and identify the delay, and the expected date of the decision.

7.10.5.1. The AF is responsible for evaluating and processing the VECP in a timely manner; however, AF is not liable for any delays in acting upon the VECP. If the VECP is not accepted the CO will notify the contractor in writing, explaining the reasons for rejection.

7.10.5.2. The CO accepts the VECP either by issuing a modification to the contract or by issuing a notice to proceed with the change. The CO accepts the VECP, in whole or in part, when a modification is completed. The VECP clause is the authority for the modification. The CO may also accept the VECP, even though an agreement on price reduction has not been reached, by issuing the contractor a notice to proceed with the change. The contractor is obligated to perform to the existing contract until the CO either issues a modification accepting the VECP or a letter to proceed.

7.10.6. Disputes. The amount of collateral savings generated by a value engineering change proposal is determined by the Contracting Officer, and cannot be appealed under the Contract Disputes Act. The contractor can file an appeal if the Contracting Officer miscalculates the contractor’s share in the savings. The contractor can also appeal if the government uses their proposal without providing for any savings to be shared. This clause also applies even if the proposed change is minor or constitutes a correction of errors in the specifications.

7.11 Payments. The FAR Clause 52.232-5, Payment under Fixed-Price Construction Contracts, authorizes the Contracting Officer to approve progress payments monthly as the work proceeds. This authorization includes authorizing the Government to make payments based upon estimates of work accomplished which meets the standards of quality established under the contract, as approved by the CO. The clause lists specific requirements a contractors request must include. For example, it requires contractors to support the payment amount they are requesting using itemized listings of work items completed, and it must identify the work performed by each subcontractor. The contractor is obligated to refund AF for unearned amounts. The clause also allows the CO to retain funds in the event satisfactory progress is not made (retainage). All material and work covered by progress payments becomes the sole property of the AF. Upon final completion of the work, retained amounts of progress payments not previously released to the contractor shall be included in the final payment to the contractor.

7.11.1. Progress Payments and Wide-Area-Work Flow (WAWF). When progress payments are authorized, a monthly progress meeting is recommended to determine the appropriate completion estimates and that the payments are correct. The contractor should conduct the meetings, and address schedule, submittals, quality and safety, request for information/variance and modification status. The WAWF progress payment function is configured to accept progress payments on construction invoices; however, it does not accommodate the work percentage of completion process. The work percentage of completion process is accomplished outside of the WAWF process. The contractor submits the AF IMT 3065, Contract Progress Report to the CO. The CO is responsible for resolving any discrepancies related to percentage of progress between the government and contractor. Upon the resolution of any discrepancies the contractor submits an invoice through WAWF.

7.11.1.1. The inspector is responsible for producing and submitting the AF IMT 3065, and verifying and certifying the report to the Contracting Officer. The inspector assists the Contracting Officer in resolving government/contractor assessment disparities.

7.11.1.2. The Contracting Officer approves the final AF IMT 3065, Contract Progress Report. After notification from Wide Area Workflow of a pending invoice, the CO may accept, reject or elect to withhold any appropriate retainage. The CO then forwards the invoice to DFAS for payment. Contracting Officers should consult the on-line guidance at http://farsite.hill.af.mil/afcep/AFCEP-35.htm#P26328_907735 to review WAWF processing of construction invoices. The website also identifies issues associated with retainage withholding.

7.11.2. Other Construction Payments. FAR 52.232-5 also entitles the contractor
to be reimbursed for bond premiums on payment and performance bonds, including coinsurance and reinsurance agreements, upon request. The contractor must furnish evidence of full payment to the surety with the payment request. Retainage is not applied to that portion of progress payments attributable to bond premiums.

7.11.3. Withholding. FAR 22.406-9 details withholding or suspending contractor payments due to contractor violations. The paragraphs below highlight specific instances when funds are required to be withheld from the contractor.

7.11.3.1. If the contractor fails to submit timely payrolls for employees and any subcontractors’ employees, the Contracting Officer will withhold an amount large enough to cover both the Air Forces interests and the employees of the contractor or subcontractor. FAR 52.222-8 also allows the CO to “…take such action as may be necessary to cause the suspension of further payment…”

7.11.3.2. If the contractor fails to pay Department of Labor required wages, fringes, or overtime, the Contracting Officer will withhold an amount equal to the underpayment.

7.11.3.3. Liquidated damages must be withheld for any days, within the invoice period, beyond the contract completion date, considering all valid time extensions. If the construction project is phased, the contracting officer will verify separate liquidated damage rates for each phase.

7.11.3.4. FAR 52.232-5 requires the contractor to notify the Contracting Officer in writing if they discover payment has been received for work that does not conform to the requirements of the contract. The contractor is obligated to deduct from a subsequent invoice an amount equal to the total previously paid for the work, plus interest.

7.11.3.5. FAR 28.106-7(b) provides authority for the Contracting Officer, upon notification from the surety, to withhold final payment after completion of the contract work. The surety must guarantee that the Government is held harmless from liabilities resulting from withholding final payment. Final payment is made after notice from the surety of agreement between themselves and the prime contractor or by judicial judgment.

7.11.4. Non-Payment of Subcontractors. FAR 28.106-7(a) forbids Contracting Officers from withholding payments to contractors or assignees because subcontractors or suppliers have not been paid. Payment bonds were created to cover subcontractor and supplier non-payment. Contracting Officers should instruct subcontractors and suppliers to work directly with the bonding company for payment remedy. After providing this information, the Contracting Officer is responsible for ensuring the following:

7.11.4.1. cross reference the allegation to information contained in the invoice since the Payments clause requires certified information pertaining to payments to all subcontractors, the amounts, any retainage or withholding, and the time of payment.

7.11.4.2. notify the prime contractor if a discrepancy is noted, and encourage timely payment, if warranted.

7.11.4.3. if authorized by the Payments clause, reduce or suspend progress payments.

7.11.5. Retainage. FAR 52.232-5 authorizes the Contracting Officer to retain a maximum of 10% of the amount of a progress payment until satisfactory progress is achieved. However, retainage is not applicable to bond premiums. When the work is substantially complete, the amount to be retained should be enough to adequately protect the Air Force.

CHAPTER 7

Construction Contract Management

Section 3 – Changes and Delays

7.12. Principal Changed Conditions Clauses.

7.12.1. Changes Clause. FAR 52.243-4 authorizes the Contracting Officer to make unilateral changes, in designated areas, within the general scope of the contract. The designated areas for construction contracts are: changes in the specifications; method or manner of performance of the work; in the Government-furnished facilities, equipment, materials, services, or site; or directing acceleration in the performance of the work.

7.12.1.1. Any change directed by the Contracting Officer other than those areas authorized by the clause are to be treated as a change order; provided, that the contractor gives the CO written notice in accordance with 52.243-4(b).

7.12.1.2. Contractor requests for equitable adjustment must be received prior to final payment of the contract.

7.12.2. Differing Site Conditions. FAR 52-236-2 authorizes the contractor to seek an equitable adjustment when conditions at the construction site differ from those indicated in the specifications and drawings. There are two general types of differing site conditions that may require a modification to the contract. Contractors may receive either time, money or both as compensation.

7.12.2.1. Type I. This condition exists when the conditions differ from what is shown in the contract. For instance, when a contractor encounters lead paint on a demolition contract that states the paint contains no lead.

7.12.2.2. Type II. This exists when conditions differ from what would normally be encountered in work of the same nature. For example, a contractor discovers an underground fuel storage tank, not shown on the drawings, while performing excavation for a new building.

7.12.3. Contracting Officers should carefully consider whether a contractor took steps to reasonably ascertain the nature and location of the work, and that the other factors listed in the Clauses FAR 52.236-3, Site Investigations and Conditions Affecting the Work and FAR 52.236-4, Physical Data could have discovered or foreseen the condition in question.
7.12.4. Suspension of Work. FAR 52.242.14 allows the Contracting Officer to suspend work for the convenience of the government. It allows the government reasonable time to make decisions, investigate progress, inspect quality, respond to questions, process submittals, revise designs, and perform other contract management activities. The clause allows the contractor to seek an equitable adjustment for increased costs directly attributable to the delay. A suspension of work notice must be in writing, and the contractor must establish that the suspension actually caused the particular increase in cost. Profit is the reward we provide the contractor for assuming performance risk under the contract. Profit is not paid for any suspension of work. Time extensions are not authorized under the Suspension of Work clause. Time extensions can be requested under the Default clause.

7.12.5. Variation in Estimated Quantity Clause. FAR 52.211-18 allows for either party to request an equitable adjustment if the quantity of a unit-priced item varies more than 15 percent above or below the estimated quantity. Any adjustment in price applies only to those quantities outside the 85-115%.

7.12.6. Construction Default Clause. FAR 52.249-10 provides the government the right to terminate when a contractor is in breach of contract. This breach may be actual or anticipatory. Recognizing that even a diligent contractor may encounter unanticipated delays beyond its control, this clause allocates the risk involved with certain delays and provides extensions of contract time to compensate the contractor when appropriate. The clause also allows for time extensions in the event of an excusable delay beyond the fault of the contractor. It provides examples of delays which may arise from causes beyond the control or without the fault of the contractor. To be excused from default under this clause, the contractor must:

7.12.6.1. provide written notice to the Contracting Officer of an excusable delay within 10 days of the beginning of such delay; and

7.12.6.2. establish the delay was, in fact, unforeseeable, beyond the contractors control, the contractor was not at fault or negligent.

7.13. Constructive Changes. A constructive change is a “change by implication” and occurs when the Contracting Officer or other authorized Government personnel, by their actions, changes the contract without specifically adhering to the requirements of the “Changes” clause. Constructive changes can be compensated with time, money or both, usually using the Changes clause as the authority. A constructive change has two elements. The first element is change, it occurs when performance exceeds the minimum contract requirements. The second element is order, and it occurs when the Contracting Officer or their representative, by word or deed, require the contractor to perform beyond the contract requirements. Constructive changes can be divided into four categories which represent the major uses of the constructive changes in administratively resolving claims against the Government.

7.13.1. Disagreements between the parties over the contract requirements. As a result of the Government’s misinterpretation of contract provision a contractor is required to perform more or different work, or to higher standard than required by the contract. For example, the contractor asks the government for assistance in devising a method of performing the work, and the Government includes work beyond the contract requirements, or the Government rejects the method of performance selected or used by a contractor even though that method is permitted by the contract.

7.13.2. Defective Specifications. Specifications may be considered defective because of a simple error, inadequate detail, practical impossibility of performance, or a combination of these.

7.13.3. Acceleration. Acceleration is increasing the rate of work above that originally planned. Acceleration can be generated by both the Government and the contractor.

7.13.3.1. Directed Under the Changes Clause FAR 52.243-3. The contracting officer directs the acceleration using FAR 52.243-4, Changes or FAR 52.236-15, Schedules clause. If directing the contractor to “get back on schedule,” the contracting officer must be diligent in removing the order when the contractor has caught up. It is recommended that the original acceleration letter contain words to the effect of “once caught up, desist the acceleration.”

7.13.3.2. Voluntary. As the name implies, voluntary acceleration is a choice the contractor makes on their behalf; however, the contracting officer can request a voluntary acceleration. Essential points to acknowledge regarding voluntary acceleration are it is for the contractor’s benefit, it is not government directed, and it is not compensable. The contracting officer or their representative should address acceleration with the contractor if there is evidence the contractor accelerated work. If the Government is aware of the acceleration and does nothing, essentially the government has agreed to allow the acceleration, and could potentially be held to have constructively accelerated the contractor.

7.13.3.3. Failure of the Government to Cooperate During Performance. The contracting officer and their representatives have an obligation to cooperate with the contractor to achieve the goals of the contract. The question of cooperation in this type of change is whether the government’s cooperation was essential to successful performance. Examples of this include when the contractor notifies the government that the site contains debris that was supposed to be removed, and the Government does nothing. Another example is where the government representative has knowledge that work was defective but does not inform the contractor and thereby knowingly permits the performance of a substantial amount of defective work. Another example is where government furnished property is not delivered in a timely manner, and the contracting officer insists the contractor comply with the original schedule.

7.13.3.4. Expediting. The contract completion date of the contract is advanced. Expediting is acceleration, but when a construction project involves the Military Construction Appropriation Act contracting personnel must pay special attention to DFARS 236-270. The contracting officer may approve an expedited completion date if no additional costs are involved.

7.13.4. Mitigating Constructive Changes. There are many steps a Contracting Officer can take to mitigate constructive changes:

7.13.4.1. become familiar with the contractor’s contract administration process.

7.13.4.2. Send a letter explaining the duties, authority, and limitations of authority identifying the key players by name and title. Make sure the letter delineates procedures for the contractor to follow if they feel there is a constructive change.

7.13.4.3. After receipt of the progress schedule, hold the pre-construction conference and progress meetings. Keep detailed minutes signed by both parties. Get information from the contractor as to how the work will be done – specific methods, specific equipment, and areas needing special assistance.

7.13.4.4. Include a concluding statement in all correspondence reminding the contractor of the obligation to provide written notice to the contracting officer if a constructive change occurs.

7.13.4.5. Review daily reports, and keep detailed written records.

7.13.4.6. Include a release statement on all modifications.

7.13.5. The Contracting Officer should obtain legal counsel, and request technical advice when notified of a constructive change.

7.14. Types of Delays. There are different types of delays with different compensations and entitlements. A well documented construction schedule is critical to this process in determining whether the contractor is behind schedule or ahead of schedule. Schedule analysis is crucial in determining what caused the delay, what impact the delay had on performance, and the computation of any liquidated damages. There are four types of delays:

7.14.1. Contractor Caused Delays. Delays incurred are because the contractor or subcontractor is at fault/or negligible. The contractor is liable for any additional cost or any resulting increase in performance time. Various recourses are available to the Government if the delays can be attributed to the contractor or their subcontractors. If the contactor does not diligently correct the delays the contractor is at risk for being terminated. If the contractor fails to complete the construction by the contract completion date, the Government can collect liquidated damages.

7.14.2. Government Caused Delays. These delays are the result of the Government acting in its contractual capacity, linking the action directly back to the contracting officer. Examples include a delay in issuing the Notice to Proceed, a delay in making the construction site available, interference with contractor’s work, failure to provide timely submittal approval, a delay in the inspection of work, or a delay in processing a modification.

7.14.3. Excusable Delays. These are delays beyond the contractor’s control, as outlined in FAR 52.233-1, Default. The contractor bears the financial responsibility of an excusable delay. The contractor is entitled to a time extension if they can show there was a delay to the overall contract.

7.14.4. Concurrent Delays. This delay exists when any combination of the other three delay types occur at the same time. Compensation for a concurrent delay varies, but is generally covered under FAR 52.242-14, Suspension of Work or FAR 52.233-1, Default clause.

7.15. Schedule Analysis. Analyzing various schedules can assist the contracting officer in establishing delays and determining compensation. The types of schedules used in the analysis are:

7.15.1. As-Planned. The as-planned schedule is the period of the contractor’s originally approved schedule.

7.15.2. Could Have Been. The could-have-been schedule is calculated as the “as planned” schedule plus any impact caused by the contractor (contractor-caused delay)

7.15.3. Properly Extended. The properly extended schedule is the original contract duration plus any government, excusable, and concurrent delays.

7.15.4. As Built. The as-built schedule represents the actual construction of the project from start to finish, and is calculated as the “as planned” schedule plus contractor, government, excusable, and concurrent delays.

7.15.5. Adjusted. The adjusted schedule is calculated as the “as planned” schedule plus contractor, concurrent, and excusable delays.

7.16. Delay Analysis. The schedules above provide the basis in determining the proper time extension, the number of days of extended overhead and the number of days of liquidated damages applied from the delay. The following equations will assist the contracting officer in determining compensation.

7.16.1. Number of Days Time Extension = (Properly Extended) – (Original Contract Duration).

7.16.2. Number of Days Extended Overhead = (As Built) - (Adjusted)

7.16.3. Number of Days Liquidated Damages = (As Built) – (Properly Extended) or (Could Have Been) – (Original Contract Duration).

7.17. Methods for Computing Overhead. Four methods are commonly used to calculate overhead. However, on occasion they do not compensate the contractor adequately for home office expenses, particularly when there is a suspension of work or government caused delay. In addition to the methods below, the Eichleay Method may be used to calculate the contractor’s unabsorbed overhead.

7.17.1. Normal Method (Percent Method). This method computes overhead as a percentage of direct costs. This method uses the approach that if the overhead rate for the original contract can be determined, then that rate can be applied to contract modifications.

7.17.2. Alternate Method. This method computes overhead as a percentage of direct costs, as in the Normal Method. However, this method uses standard percentages rather than performing an analysis of the contractor’s indirect costs.

7.17.3. Daily Rate Method (Per-Day Method). This method computes the overhead applicable to a single day of operations. This method is typically used when the modification requires a lengthy time extension.

7.17.4. Fixed & Variable Cost Method. This method computes the variable field overhead cost and the fixed field overhead costs. It is used by contracting personnel with significant experience in dealing with construction contract overhead. It is used in cases where there is both a cost increase and a time extension. This method eliminates the duplication of overhead reimbursement that can occur when applying other methods.

CHAPTER 7

Construction Contract Management

Section 4 - Liquidated Damages and Contract Termination

7.18. Beneficial Occupancy. The Government has the right to occupy a building prior to final acceptance. It requires the Contracting Officer to notify the contractor, in writing when that occupancy occurs. The Government assumes all risk when occupying the premises early with the exception of latent defects or fraud. If alterations, repairs or changes to the facility or equipment occur prior final acceptance, both parties’ rights under the contract clauses for warranty and inspection may be altered.

7.19. Termination.

7.19.1. Termination for Default. The Show Cause/Cure Notice requirements of FAR 49.402-3 will be utilized prior to a contracting officer terminating a construction contractor for default. FAR 49.504 provides that the Air Force may take over the work and complete the project, by contract or otherwise. The contractor is liable for any additional cost incurred in completing the project, to include the loss incurred for delayed completion of the work. The Contracting Officer must consider the following factors in determining whether to terminate a contract for default:

7.19.1.1. The provisions of the contract and applicable laws and regulations.

7.19.1.2. The specific failure of the contractor, and the reasons, if any, made by the contractor for such failure.

7.19.1.3. The possibility of excusable delays.

7.19.1.4. The availability of construction services from other sources.

7.19.1.5. The urgency of the need and the period of time which would be required to work by other sources as compared with the time in which completion could be obtained from the delinquent contractor.

7.19.1.6. The availability of funds to finance repurchases costs which may prove to be uncollectible from the defaulted contractor, and the availability of funds to finance termination costs if the default is determined to be excusable.

7.19.1.7. Any other pertinent facts and circumstances.

7.19.2. Actions in Lieu of Termination for Default. When in the best interest of the Government, the Contracting Officer may take the following actions:

7.19.2.1. Permit the contractor, or its surety to continue performance of the contract under a revised schedule.

7.19.2.2. Permit the contractor to continue performance of the contract by means of a subcontract with an acceptable third party, provided the rights of the Government are adequately preserved.

17.20. Liquidated Damages. Liquidated damages are to be assessed against the contractor for each day of unexcused delay. If the clause FAR 52.211-10 is used with its alternate specifying phased construction, liquidated damages should be assessed for each day of delay associated with the particular phase. It is recommended that legal assistance be sought prior to the assessment of liquidated damages.

7.20.1.Default Clause. Liquidated damage remedies are in addition to other remedies provided by the default clause. This means that the Contracting Officer can exercise the government’s right to recover liquidated damages for unexcusable delays, as well as exercise its right of termination, and cause transfer of title to work in place and engage in reprocurement actions charging excess costs to the defaulted contractor.

7.20.2. Surety Takeover. The Contracting Officer may enter into a written agreement with the surety. Consideration should be given to having the agreement include both the surety and the defaulting contractor in order to eliminate any disagreement as to the contractor’s residual rights, such as claims to unpaid prior earnings. The agreement must provide that the surety will undertake the work required by the contract in accordance with all the terms and conditions of the contract. It must also provide that the Government will pay the surety in the manner provided by the contract, but not in excess of the surety’s costs and expenses, the balance of the contract price unpaid at the time of the default, subject to those issues at FAR 49.404(e).

7.20.2.1. Completion by Another Contractor. If the surety does not arrange for completion of the contract, the Contracting Officer normally will arrange for completion of the work by awarding a new contract based on the same plans and specifications.

7.20.2.2. Air Force Completion of the Work. In-house employees can be used to complete the project. Excess costs can generally be recoverable when an urgent need can be demonstrated and there is no reasonable alternative under the circumstances. The same standards of reasonableness and similarity would be applied where the work is completed in-house. Where a surety is involved, the acquiescence or specific approval of the surety should be obtained.

7.20.2.3. If the requirement for the completion of the work specified in the contract no longer exists and the contractor is not liable for damages, execute a no-cost termination settlement agreement

CHAPTER 7

Construction Contract Management

Section 5 – Contract Completion

7.21. Final Contract Completion.

7.21.1. FAR Clause 52.246-12, Inspection of Construction, allows the inspection of already completed work prior to accepting an entire facility. The contractor should notify the contracting officer that the project is nearing completion. At this time, a pre-final inspection is held. It is typical for the contracting officer, QA personnel, contractor personnel (to include subcontractors), requirements personnel, operations and maintenance personnel, and representatives throughout the installation (fire, safety, security, etc) to attend the pre-final inspection.

7.21.2. As part of the “walk thru” a punch list is developed identifying items that do not conform to the contract requirements and require correction, prior to acceptance. The items appearing on the punch list are usually minor in nature.

7.21.3. Beneficial Occupancy. FAR 52.236-11, Use and Possession Prior to Completion, allows for the occupation of a building prior to final acceptance. The Contracting Officer must notify the contractor, in writing, when the occupancy occurs. If it is decided to occupy the building all risk falls on the AF, with the exception of latent defects, or fraud. If the Air Force occupies the facility they must ensure there is no alteration, repair or change in any way to the facility, or any equipment therein. Changes of this nature could alter the Government’s rights under the contract clauses for warranty and inspection.

7.21.4. Transfer of Construction. The AF has no formal guidance on the transfer of a completed project, however, the transfer must be in writing and should provide as a minimum:

7.21.4.1. All operating and maintenance manuals, as well as wiring diagrams, piping layouts, valve charts, valve tags, color codes for wiring and piping, and a spare parts catalog

7.21.4.2. List of equipment covered by warranty under the terms and conditions of the contract

7.21.4.3. Copies of all warranty documents

7.21.4.4. Copies of test results for mechanical and electrical systems and/or equipment

7.21.4.5. All specialized keys (tagged), handles and tools

7.21.4.6. For real property transfers use the DD Form 1354, Transfer and Acceptance of Real Military Property

7.21.5. Performance Evaluations. Technical representatives and/or contracting personnel normally prepare the performance evaluation. Contractor evaluations will be completed in accordance with the DoD Contractor Performance Assessment Reporting System Policy Guide. However, FAR 36.201 requires that all performance evaluations are to be reviewed by an official who is knowledgeable of the contractor’s performance on the project and should be one organizational level above the evaluator. A copy of the evaluation report is provided to the central database Construction Contract Appraisal Support System (CCASS). The reports can be submitted and reviewed at http://cpars.navy.mil/ccassmain.htm. Architect and Engineering firms should be evaluated by having the CCASS/ACASS Focal Point request a reactivation of the original design contact. The local CCASS/ACASS focal Point can then provide additional instructions on re-evaluating the A&E Firm.

7.21.6. FAR 36.604 authorizes the evaluation of the Architect-Engineer firm responsible for the design after construction has been completed.

7.22. Contract Closeout. Construction contract files are closed in accordance with FAR 4.804 and DFARS 204.804. If construction contracts include environmental issues, such as, the removal of hazardous soils, materials, waste, asbestos, coordinate with the organizational Environmental Division, for additional records retention requirements. The Pre-Final Payment Checklist template in IG5336.90 can be used for documenting the pre-final payment.