Contractor’s Lackadaisical Proposal Preparation Sinks Its Claim for Costs

To federal construction contractors, the true legwork may seem to begin only after the government has accepted a proposal and performance has begun. However, a recent Armed Services Board of Contract Appeals decision reinforces that federal construction contractors’ work often should begin long before contract award.

In Zafer Construction Company, ASBCA No. 56769 (2017), the ASBCA rejected a construction contractor’s allegations of unilateral mistake, unconscionability, and differing site conditions (among other claims for additional costs). The problem? The contractor did not attend a government scheduled site visit, conduct an independent site visit, review technical drawings, submit any inquiries during the proposal stage, or otherwise take reasonable steps necessary to better ascertain the nature of the work prior to submitting a multimillion dollar proposal on a complex project.

By way of background, the contract in Zafer involved the U.S. Army Corps of Engineers’ procurement of renovation work at the Afghanistan National Military Hospital in Kabul, Afghanistan. In 2004, the buildings at this site had fallen into varying states of disrepair. In preparation for issuing the solicitation, the government employed an assessment team (called the Baker team) to survey the site, assess the condition of the buildings and infrastructure, and prepare a report for the government’s use in budgeting and defining the scope of work.

The solicitation used the Baker report and designated certain building as part of a “base bid” and other buildings under “option bids.” The solicitation and Baker report both referenced “Russian drawings” (voluminous, highly-detailed, and specific drawings of the buildings created by the Soviet Union in the 1970s), which were available at the facility’s engineering office for inspection by prospective offerors. The Solicitation incorporated both FAR 52.236-2 (Differing Site Conditions) and FAR 52.236-3 (Site Investigation and Conditions Affecting the Work). These FAR provisions placed affirmative duties on the contractor in submitting a proposal and during contract performance.

Specifically, the Differing Site Conditions clause required:

(a) The Contractor shall promptly, and before the conditions are disturbed, give a written notice to the Contracting Officer of (1) subsurface or latent physical conditions at the site which differ materially from those indicated in this contract, or (2) unknown physical conditions at the site of an unusual nature, which differ materially from those ordinarily encountered and generally recognized as inhering in work of the character provided for in the contract.

Additionally, the Site Investigation and Conditions Affecting the Work clause states in relevant part:

(a) The Contractor acknowledges that it has taken steps reasonably necessary to ascertain the nature and location of the work, and that it has investigated and satisfied itself as to the general and local conditions which can affect the work or its costs, including but not limited to… (4) the conformation and conditions of the ground; and (5) the character of equipment and facilities needed preliminary to and during work performance. The Contractor also acknowledges that it has satisfied itself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered insofar as this information is reasonably ascertainable from an inspection of the site…as well as from the drawing and specifications made a part of this contract. Any failure of the Contractor to take the actions described and acknowledged in this paragraph will not relieve the Contractor from responsibility for estimating properly the difficulty and cost of successfully performing the work, or for proceeding to successfully perform the work without additional expense to the Government.

Despite not attending any site visit, obtaining technical drawings, or inquiring about site conditions, Zafer submitted a proposal at a firm-fixed price of $16,508,725, which was roughly 28 percent lower than its chief competitor and 43 percent less than the total independent government estimate. After confirming Zafer’s proposed price, the Corps awarded the contract to Zafer.

Following contract award, Zafer conducted a preconstruction site assessment visit and discovered it had significantly miscalculated its estimated work area, including failing to account for basements and above-grade areas. Zafer proceeded to perform the work, but following contract completion, Zafer submitted a certified claim for $4,104,891 for renovation work in basements and above-grade areas that was alleged to be beyond the scope described in the solicitation.

Following the government’s denial of the claim, Zafer submitted a timely appeal to the ASBCA. Among the claims alleged, Zafer argued unilateral mistake, unconscionability, and differing site conditions. The ASBCA methodically denied each of these arguments.

With respect to the unilateral mistake argument, the ASBCA outlined the five elements necessary for establishing such a mistake occurred, but concluded Zafer had failed to establish at least three of the elements. Specifically, Zafer had not established: (1) a mistake in fact occurred prior to contract award, (2) the mistake was a clear-cut clerical or mathematical error or a misreading of the specifications and not a judgment error, or (3) proof of the intended bid. First, Zafer did not establish its proposal was based on or embodied a mistake rather than a business decision to assume the risks of a lower-priced proposal. Second, a misreading of specifications imposes a duty to inquire where there are gaps, inconsistencies, or insufficient information. Here, Zafer’s mistake resulted from “gross negligence in failing to read and consider the specifications thoroughly, and the contract made assumptions without any attempt of verification with the government.” Finally, Zafer failed to show any evidence of the basis of its price proposal other than a listing of the lump-sum prices it had proposed for each building.

The Board rejected Zafer’s unconscionability argument for similar reasons. In assessing this argument, the Board noted, “an unconscionable contract is ‘one which no man in his senses, not under a delusion, would make, on the one hand, and which no fair and honest man would accept on the other.’” Disparity in proposal prices alone is insufficient to establish such a claim. In this case, the government had confirmed Zafer’s price proposal prior to award. Additionally, the contracting officer reasonably believed that the price disparity arose because the next lowest offeror proposed using a subcontractor based in the United States, whereas Zafer had proposed a local (and presumably, cheaper) workforce.

The Board also entertained Zafer’s claim for differing site conditions, but noted that it was not entirely clear whether Zafer intended to pursue relief under this theory. Regardless, the Board explained that the FAR’s Differing Site Conditions clause allows contractors to submit more accurate bids by eliminating the need for contractors to inflate their bids to account for contingencies that may not occur. “Differing site conditions can arise in two circumstances: (1) the conditions encountered differ from those indicated in the contract (Type I), or (2) the conditions encountered differ from those normally encountered (Type II).”

The Board rejected both types, finding Zafer faced the same impediments to satisfying a claim for differing site conditions as a claim for unilateral mistake. In assessing Type I, the Board found the information provided by the government, including the Baker sketches and Russian drawings, clearly indicated the existence of basements and above-grade areas, and Zafer furnished no evidence that it even attempted to obtain this information until after contract award. As for Type II, Zafer presented no evidence that the basements and above-grade areas were “unknown conditions” or of an “unusual nature.”

The Board denied all of other Zafer’s arguments, too, and rejected its appeal.

Zafer ultimately provides words to the wise federal construction contractor – do some legwork upfront, when that’s what circumstances suggest a reasonable bidder would do.  This may include, as appropriate, conducting a pre-award site visit, reviewing the solicitation specifics in depth, asking questions where the solicitation is unclear, and otherwise taking steps to ascertain the full nature of the work. Such pre-award steps are particularly important when submitting a proposal on a multimillion dollar complex construction project, because the government isn’t to blame if a contractor’s failure to do its due diligence results in an underpriced proposal – an expensive and hard-learned lesson for Zafer.