Preserving Contractor Rights Under Changes Clauses
08/01/2005

Article originally appeared in Contract Management on 08/01/05

Contracts are predictions. Intended to govern the future relationship between parties, the reality is that contracts run into unanticipated conditions and events, necessitating changes. The more complicated the purpose of the contract, the more likely it is the parties will have to deal with the unexpected.

In contracts with the U.S. government, changes are addressed by “Changes” clauses. Changes clauses provide a procedure by which changes to a contract are identified and the contract modified accordingly. Changes may be actual or constructive. An actual change occurs when a contracting officer issues a written order pursuant to a Changes clause. A constructive change arises when a contractor is forced to change its performance of a contract without receiving a written change order. 

Changes clauses require contractors seeking compensation for changes to preserve their rights by giving notice to the government. This article addresses how a contractor is to provide notice, how the notice requirements are enforced, and the resulting lessons for contractors.

Notice Required Under Changes Clauses 
Changes clauses are usually incorporated into government contracts from the Federal Acquisition Regulation (FAR). The FAR contains six Changes clauses. The first three of these clauses, titled, Changes—Fixed-Price, Changes—Cost-Reimbursement, and Changes—Time-and-Materials or Labor-Hours, are to be incorporated into fixed-price supply contracts, cost-reimbursement contracts, and time-and-materials or labor-hours contracts, respectively.

These clauses provide that the contracting officer may, at any time and by written order, make changes within the general scope of the contract. If such a change order causes an increase in the contractor’s cost of performance or the time required for performance, the contractor may pursue an equitable adjustment to the contract. Yet, to preserve its right to seek such an adjustment, the contractor must first provide proper notice to the government.

The notice provisions in each of these Changes clauses are nearly identical. They state that after a change to the contract is ordered by the contracting officer, the contractor has 30 days from the date of receipt of the written order to assert its right to an equitable adjustment. However, if the contracting officer decides that the facts justify it, the contracting officer may act upon a proposal submitted after the 30 days have run, so long as it is submitted before final payment of the contract.

The fourth Changes clause, titled simply, Changes, is to be inserted in fixed-price contracts for demolition and construction. This clause has separate notice procedures for actual and constructive changes. The actual change provision is similar to the first three Changes clauses. The contracting officer may, at any time and by written order, make changes within the general scope of the contract.

When such an order is issued the contractor must assert its right to an adjustment within 30 days after receipt of the order. The constructive change provision states that any other written or oral order (which includes direction, instruction, interpretation, or determination) from the contracting officer that causes a change shall be treated as a change order, provided that the contractor gives the contracting officer written notice stating:

(1) The date, circumstances, and source of the order; and

(2) That the contractor regards the order as a change order.

Except where defective specificationsare involved, no adjustment for any constructive change shall be made for any costs incurred more than 20 days before the contractor gives notice that a constructive change has occurred.4 After giving notice of a constructive change, the contractor then has 30 days to assert its right to an adjustment.No proposal by the contractor for an equitable adjustment under this clause will be allowed if asserted after final payment under the contract.

The fifth Changes clause, Changes and Changed Conditions, is inserted in construction contracts.5 This clause provides that the contracting officer may, in writing, order changes in the drawings and specifications within the general scope of the contract. Moreover, apart from actual changes, the clause states that the contractor is to promptly notify the contracting officer, in writing, of subsurface or latent physical conditions differing materially from those disclosed in the contract, or previously unknown unusual physical conditions at the site, before proceeding with the work.

If the written changes or physicalconditions increase the cost of or time required for performing the work,the contracting officer shall make anequitable adjustment upon submittalof a proposal before final payment under the contract. The contractingofficer will not, however, make an equitable adjustment unless the contracting officer has received therequired written notice or the contracting officer waives this requirement.

The sixth Changes clause in the FAR, Notification of Changes, is optional and used primarily in negotiated research and development, or supply contracts, for the acquisition ofmajor weapons systems or principalsubsystems where the contract amountis expected to be at least $1 million.6 This clause provides that the contractor is to notify the administrative contracting officer in writing within a negotiated number of days from the date that the contractor identifies any government conduct (includingactions, inactions, and written or verbal communications) that the contractor regards as a change to the contract terms and conditions. To the extent such information is available to the contractor, the notice shall include details concerning the circumstances and effect of the change.

Although they share many similarities,these notice provisions also have theirdifferences. Most obvious are the lengthof the various notice periods. The construction Changes clause includes both a 20-day and 30-day notice period. The Changes and Changed Conditions clause does not require notice within a certain number of days, but instead states the contractor must give notice before proceeding with the work. The Notification of Changes clause provides that notice will be given within a negotiated number of days. The notice provisionsin the other Changes clauses all require 30-day notice.

These notice provisions also differ as to the form of notice required. The Fixed-Price, Cost-Reimbursement, and Time-and-Materials Changes clauses do not require that the contractor’s notice be in writing. In contrast, the notice provisions in the construction Changes clause, the Changes and Changed Conditions clause, and the Notification of Changesclause all require written notice.

Another distinction among the notice provisions concerns the information that must be set forth in the notice. The Fixed-Price, Cost-Reimbursement, Time-and-Materials, and Changes and Changed Conditions clauses do not specify what must be included. The Changes clause for construction contracts requires the 30-day notice to state the general nature and amount of the proposed adjustment. The 20-day notice under this clause must include facts giving rise to the order and the contractor’s assertion that it regards the order as a change order. The most detailed notice is required by the Notification of Changes clause that contains a lengthy list of the information to be submitted.7

The notice provisions further differ as to the flexibility they allow in administering the notice deadline. Each of the first three Changes clauses permit the contracting officer to act on a proposal submitted after the notice deadline, if the facts justify it. The Changes clause for construction contracts allows the government to extend the 30-day period for the contractor to assert its right to an adjustment. However, this clause does not provide for the 20-day notice period to be extended. The Changes and Changed Conditions clause allows the contracting officer to waive the requirement for written notice. While the Notification of Changes clause permits the parties to negotiate the number of days within which the contractor must provide notice, the clause does not provide for an extension or waiver of this deadline.

Notice Required to Preserve Right to Equitable Adjustment

Cases construing the Changes clauses show that the notice requirements inthese provisions can be and have beeninvoked to deny contractor claims forequitable adjustment. For example, inEggers & Higgins v. United States,8 an architect-engineer submitted arequest for modification of its contractto pay for acceleration costs. The Changes clause in the contract requiredrequests for adjustment be made within10 days from the date the change was ordered. Unfortunately, the contractordid not submit its request for 5 1⁄2 years after the events on which the change was based. In addition, 13 modifications to the contract were negotiated by the parties over the term of the contract, but not one mentioned acceleration. Under these circumstances, the Court of Claims found that the government was substantially prejudiced by a long and unreasonable delay in furnishing notice of the claim.

A contractor’s claim was also denied for inadequate notice in Ervin & Associates, Inc. v. United States,9 wherethe contractor alleged that the government’s demands for data downloads amounted to a constructivechange to its contract. However, the contractor failed to notify the contracting officer of these demands. The Court of Federal Claims held that, inlight of the contractor’s significant prior working relationship with the agency, the contractor knew or shouldhave known of the requirement to inform the contracting officer directly of any issues regarding the contract. The court further found that appropriate notification to the contracting officer would have allowed the government the opportunity to make an inquiry and address the situation before the contractor began performingallegedly extra-contractual work.

This case further demonstrates that a contractor experienced in dealing with an agency may have a greater obligation to conform strictly to the notice requirements of the applicable Changes clause. Likewise, a "sophisticated" contractor is deemed to be well aware of its notice obligations.10

The Court of Claims has said that under the Changes clause the burdenis on the contractor to obtain approvalfor any changes from the contracting officer in a timely fashion and in writing.11 Similarly, the Armed Services Board of Contract Appeals (ASBCA) has stated it is elementary that a changed condition claim ordinarily must fail unless the contractor has given the government prompt writtennotice of the alleged changed conditionas soon as it has been encountered. In Schnip Building Company,12 the board rejected the contractor’s contention that it provided oral notice, finding it was "incredible" that a subsurface problem of the magnitude alleged by the contractor was never made a matter of record. No minutesor daily reports prepared by the contractor, and no letter or other correspondence, addressed the issue.

As noted, the 20-day notice requirement in the Changes clause for construction contracts is not subject

to the contracting officer’s discretion to waive or extend the deadline. Some courts and boards have taken this to mean that this notice provision will be strictly enforced and no untimely notices will be effective.13

Notice Requirements Not Strictly Enforced

Although contractor claims may be denied for lack of adequate notice, generally speaking, the notice requirements in the Changes clauses have notbeen strictly enforced.14 Courts and boards prefer to address the merits of claims even if notice is untimely. The most commonly recognized exception to the notice requirement is where responsible government officials are aware, or should be aware, of the facts giving rise to a claim.15 If a contracting officer maintains actual or constructiveknowledge of the conditions that caused a constructive change to the contract, in most cases, no prejudice to the government arises.16

When the government has been put on actual notice of an equitable adjustment for a constructive change to the contract, the notice requirementis satisfied, regardless of the medium through which the notice was conveyed.The failure by a contractor to interposea timely, formal notice, standing alone,does not require denial of a claim.17

Some case decisions recognize an actual knowledge exception, even whenthe contracting officer lacks knowledge.Where government officials charged with immediate responsibility for administering a contract were aware of the operative facts pertaining to the claim, the Interior Board of Contract Appeals (IBCA) in Hartford Accident and Indemnity Company,18 held that such knowledge may be imputed to the contracting officer. A requirement for written notice of a change can also be satisfied by notes in the daily report of a field inspector, where that inspector was the government’s representative on the job. Likewise, where the government’s project supervisor and contracting officer’s representativewas on site about a third of the time and became aware of conditions resulting in the contractor’s request forequitable adjustment, the government was found to have had actual notice.19

A limit on the knowledge that can be imputed to the contracting officer was imposed by the ASBCA in C.H. Leavell & Company.20 The board held that for the actual knowledge of government inspectors to constitute constructive notice, there must be either complaints by the contractor or something so unusual about the physical condition as to place upon them the duty to report to their superiors.

When the government has actual knowledge of the facts underlying thecontractor’s claim, the burden is on the government to establish that it wasprejudiced by the absence of formal notice. This burden cannot be satisfiedsimply by allegation, but must be supported by evidence in the record.21

Even if the government can prove itwas prejudiced by inadequate notice, the contractor’s claim is not barred. Instead, courts and boards have increased the contractor’s burden of proof. This greater burden is commensurate with the prejudice to the government caused by lack of adequate notice.22 To satisfy this increased burden of proof, the contractor must provide substantial evidence in support of its claim.23

In Bohemia, Inc.,24 the contractoralleged that the government wrongfullyrejected rock obtained by the contractorfor use in a dam embankment, therebyrequiring the contractor to use more expensive rock. The contractor alleged this constituted a constructive change. The Corps of Engineers Board of Contract Appeals (ENGBCA) noted that where the contractor’s behavior under the contract consisted of a desultory pattern of complaints about the government’s rock evaluation process, the contractor’s lack of timely and vigorous notice or protest of the alleged change did not bar assertion of the claim. Rather, it raised skepticism on the part of the board as to the significance, magnitude, materiality, and even the fact of the change.

A second exception to the notice requirements exists where notice wouldnot have affected the government’s ability to mitigate its damages.25 A court may consider whether the government has been unnecessarily put at risk—either the risk of additional liability to the contractor, or the risk of being unable to prepare and presentits defense to the contractor’s claim—by the contractor’s delay in notifying the government of the pertinent facts. A valid changes claim, filed before final payment, should not be barred by failure to give notice in accordancewith the appropriate provision when it is reasonably certain that the government would not have acted differently had such notice been given.26

A third exception to the notice requirements in the Changes clauses is recognized where the contracting officer decides the contractor’s claim on the merits. By reaching the merits of a claim, the contracting officer is implicitly admitting that late notice didnot prejudice the government.27 If thecontracting officer considers the claimon the merits, the contracting officer is deemed to have waived the notice requirement.28 A contracting officer has been found, however, not to havewaived the notice requirement by considering a claim on its merits wherehe emphasized, in his final decision, the prejudice suffered by the government from the lack of timely notice.29

Lessons for Contractors

The notice requirements set forth in the Changes clauses, and how these requirements have been interpreted, suggest the following three lessons for contractors seeking to preserve claims for equitable adjustment:

#1 Comply with the Changes Clause

To the extent possible, contractors should fully comply with the notice requirements of the applicable Changesclause. This is particularly importantfor experienced and sophisticated contractors. Although these requirements are generally not strictly enforced,claims have been denied where contractors have not given adequate notice. Some contractors who have developed a good relationship with a

contracting officer may be reluctant to rock the boat by invoking theChanges clause, preferring to address compensation for changes informally. While this approach is understandable,it is also risky. Almost certainly, a contractor is better off complying with the Changes clause, which is, after all, a procedure the government imposes on the contractor.

Contractors should give written notice directly to the contracting officer as soon as they become aware of any changes, whether actual or constructive. The notice should be as detailed as possible. The several items of information required to be included in notices under the Notification of Changes clause can serve as a useful checklist for notice under any of the Changes clauses.

#2 Provide Notice, Even if Untimely

If a contractor believes a change to the contract has increased the cost of, or time required for, performance, but has failed to give notice to the contracting officer within the period required by the Changes clause, the contractor should give notice as soon as possible. The contractor should not assume that just because it did not strictly comply with the Changes clause, its request for an equitable adjustment will be denied.

#3 Communicate with the Government

Contractors should maintain a steady stream of written communications with the government in the form of correspondence, daily reports, minutes,and other writings. Particular care should be taken to document any unexpected or changed conditions that arise, regardless of whether or not the contractor believes the change is material or has a cost impact on the contract. Should the contractor later decide that such a change does indeed give rise to a claim for equitable adjustment, it would be helpful to show the government has long been aware of the facts underlying that claim.

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