Want to Recover Increased Costs Caused by an Epidemic? Look at Your Contract!

Contractors in the COVID-19 era may be tempted to think that the Government will compensate them for increased costs caused by virus-induced shutdowns, quarantines, and the like. And this line of thought has some inherent appeal.

After all, the virus was entirely unforeseen by both parties when the contract was inked. So shouldn’t the customer–the party wanting the good or service–bear the risk of these extraordinary events?

In a very timely and relatable case, the Civilian Board of Contract Appeals squelched the idea that the Government must pay these increased costs–particularly in the context of fixed price contracts. In that case, Pernix Serka Joint Venture v. Dep’t of State, CBCA 5683 (Apr. 22, 2020), the contractor also confronted an epidemic: an outbreak of Ebola in Sierra Leone.

In that case, Pernix Serka had been awarded a firm, fixed-price contract to construct a rainwater capture and storage system in Freetown, Sierra Leone’s capital. This price included all labor, materials, equipment, and services necessary to complete the project; but the contractor was able to recover a limited reimbursement for value added taxes. Importantly, the contract contained a provision that “allowed time, not money, for excusable delays as defined in FAR 52.249-10.” Grounds for excusable delays included “epidemics” and “quarantine restrictions”

In March 2014, an Ebola outbreak began in Guinea and then spread to Freetown in July 2014. Naturally concerned with the situation, Pernix Serka reached out to the contracting officer about whether to demobilize from the project. The contracting officer provided no guidance, laying that decision squarely on Pernix Serka’s shoulders.

Then, in early August, the World Health Organization declared the outbreak an international public health emergency and airlines suspended flights to the region. At the same time, Pernix Serka decided to demobilize, evacuated its in-country personnel, and notified the State Department. In reply, the agency informed Pernix Serka that there would be no grounds to claim an entitlement to increased costs in connection with the demobilization.

In mid-March 2015, Pernix Serka returned to the project site. To protect its workers, Pernix Serka expanded an existing medical facility and hired a licensed paramedic. After submitting REAs, which the agency denied, Pernix Serka eventually submitted a certified claim for $1,255,759.88 for (1) the life and safety measures needed to safeguard its personnel, and (2) the additional costs incurred by the demobilization and remobilization. This claim too was denied, and Pernix Serka appealed.

For CBCA, the case wasn’t even close; the contract was firm, fixed-price and Pernix Serka, not the Government, bore the risk of increased costs for an unforeseen epidemic:

[Pernix Serka’s] firm, fixed-price contract obligated [Pernix Serka] to perform and receive only the fixed price. The contract . . . and the referenced FAR clause 52.249-10, explicitly addresses how acts of God, epidemics, and quarantine restrictions are to be treated. A contractor is entitled to additional time but not additional costs. Appellant’s attempts to shift the risks clearly articulated by the contact are unavailing.

Particularly given the Excusable Delays clause, [Pernix Serka] has not identified any clause in the contract that served to shift the risk to the Government for any costs incurred due to an unforeseen epidemic. Nor does the contract require the Government to provide [Pernix Serka] with direction on how to respond to the Ebola outbreak. Thus, under a firm, fixed-price contract, [Pernix Serka] must bear the additional costs of contract performance, even if [Pernix Serka] did not contemplate those measures at the time it submitted its proposal or at contract award.

Like a writhing prey attempting to escape from its predator’s jaws, Pernix Serka desperately threw out legal theories to overcome the contract’s clear risk allocation. It tried to argue cardinal change–a drastic alteration to performance caused by the government–arguing that DOS “expected [Pernix Serka] to work in Ebola crisis conditions without any guidance or direction . . . or a suspension of work . . . and [DOS] forced [Pernix Serka] to return to the project site adding life safety measures not in [Pernix Serka’s] approved work plan.” But CBCA held that this did not constitute a cardinal change because the “Government never changed the description of work it expected from the contractor.”

Pernix Serka also tried constructive change: an informal change in the contract originating that is the government’s fault. But CBCA didn’t buy it, holding that Pernix Serka’s arguments “fall short in proving that the Government ordered it to take action in response to the Ebola outbreak or that the Government’s inaction rose to the level of a constructive change.” In the end, Pernix Serka got zilch.

This case is a very good reminder that a contract is a contract. Especially in a fixed price contracts, the entire onus of performance rests with the contractor. And the Government isn’t interested in paying–and, more to the point, won’t pay–more for unforeseen events, even those that essentially inhibit performance. The excusable delay clause may buy you more time or excuse default, but it isn’t an insurance policy against unexpected costs.

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