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Forensic Accounting

Cumulative Impact of Change Orders –


Real But Difficult to Prove
By James L. McGovern & Jack A. Lazarczyk

W
e never thought we would es.” Coates Indus. Piping, Inc., VABCA No. ously incurred by approved change orders
say it, but two plus two, 5412, 99–2 BCA ¶ 30,479, 150,586. and other factors, such as a contractor’s
sometimes, is more than Two points are important when consid- self-inflicted harm.
four. While this may appear ering cumulative impact. One, there is no Representative Cases
like an introduction to a bad accounting bright line as to exactly when cumulative Claims for cumulative impact have been
joke, it is an accurate description of what is impact occurs, and two, the true cost of recognized since the late 1960s after the
known in the construction industry as the cumulative impact is often not discovered federal government changed the Standard
cumulative impact of change orders. until project completion. Changes Clause in 1967, adding language
What is Cumulative Impact? The sum of individually priced change that covers the effect of changes on un-
Change orders are a fact of life on nearly orders typically fails to capture cumulative changed work. Prior to then, the Rice Doc-
all construction projects. They come from impact. The Electrical Contracting Founda- trine had precluded courts from consider-
design changes, owner’s requests or un- tion (ECF), the Construction Industry In- ing the effect of change orders on portions
foreseen circumstances or conditions. It is stitute (CII) and the Mechanical Contract- of the work not directly covered by the
expected and anticipated by contractors. ing Foundation (MCF) have commissioned change as ruled in United States v. Rice 317
They can add, subtract or modify work on research in this area conducted by professor U.S. 61 (1942).
projects and are typically accommodated Awad Hanna of the University of Wisconsin However, since then findings on the ap-
without disrupting the base work or af- – Madison. Hanna’s research confirmed the plication of cumulative impact damages has
fecting the overall schedule. However, on impact of multiple change orders on labor not yielded a bright-line solution in the law.
some projects, there comes a point when productivity and offered a methodology to In the cases where cumulative impact dam-
the number of changes starts impacting quantify it. Id. At 125(4), 224–232. ages were denied, one or more of the follow-
the overall progress and productivity on While cumulative impact damages have ing reasons were cited: (a) the change orders
the project. been recognized in theory, the resulting did not result in a fundamental change in
Cumulative impact has been described claims are often viewed by owners and the contract; (b) there was insufficient proof
as, “The unforeseeable disruption of pro- their representatives with skepticism. The of a causal connection between the change
ductivity resulting from the synergistic ef- challenge lies in proving causation and orders and lost productivity; or (c) waiver
fect of an undifferentiated group of chang- segregating the damages from costs previ- language in the contract or change orders
prohibited recovery.
Bell BCI Co. Case
James McGovern is a founding partner of McGovern & Greene LLP, a forensic accounting and litigation
One case that stands out as particularly
services consulting firm. He is a certified public accountant, certified in financial forensics and a certified
valuation analyst. He works as a consultant and expert witness on matters involving complex financial and
instructive is Bell BCI Co. v. United States
economic damage issues. Jack A. Lazarczyk is a senior consultant at McGovern & Greene, LLP. He is a
81 Fed. Cl. 617 (2008).
licensed CPA and a certified valuation analyst. He works on consulting and expert witness assignments Back in 2008, the contracting commu-
involving valuations and economic damages. He has over 20 years of combined architectural, engineering nity was on the edge of its seat, reading an
and financial experience in both the public and private sectors. opinion issued by the United States Court
of Federal Claims. The opinion validated
what many in the construction industry al-
ready knew, but had a hard time proving;
namely that, multiple change orders can
cause damages by reaping havoc on project
schedules and productivity.
Bell BCI Company was hired to construct
a laboratory building at the National Insti-
tute of Health (NIH) campus in Bethesda,
Maryland. NIH issued more than 200 con-
tract modifications, which included the ad-
Jack A. Lazarczyk James L. McGovern
dition of a new floor nine months into the
construction. These changes delayed the

20 | www.AttorneyAtLawMagazine.com
completion of the project by 19½ months 93 was different from previous modifica- The appeals court remanded the case to
and increased the contract price by 34 per- tions in that it contained new waiver and the Court of Federal Claims to determine
cent or $21.4 million. Although Bell was release language stating: what portion of Bell’s cumulative impacts
paid for most of the change orders, the and delays were attributable to Mod 93 or
company asserted an impact claim for the The modification agreed to herein is other modifications containing the same
cumulative affect of the changes on Bell’s a fair and equitable adjustment for waiver language.
overall performance. the Contractor’s direct and indirect In our opinion, determining a particular
Judge Thomas C. Wheeler found in favor costs. This modification provides full change order’s contribution to the cumula-
of Bell and noted in a brief summary that compensation for the changed work, tive impact is a very difficult, if not impos-
the addition of a new floor after construc- including both Contract cost and sible, task. It goes against the grain of the
tion had begun caused many mechanical Contract time. The Contractor here- very premise of the cumulative impact; that
and electrical changes after the work had by releases the Government from any the damages are not caused by individual
already been installed. While the changes and all liability under the Contract events, but their aggregate. Not surprisingly,
and delays continued to accumulate, NIH for further equitable adjustment at- that task was never completed in that case
and its representative compounded the tributable to the Modification. as attorneys for the government and the
problems by directing Bell to perform ex- contractor, Bell, submitted a joint stipula-
tra work without time extensions or autho- Bell argued that by signing this modifi- tion of dismissal to the U.S. Court of Fed-
rizing Bell to accelerate performance. The cation, it was agreeing to the cost of add- eral Claims ending seven years of litigation.
judge found NIH’s defense of accord and ing the additional floor, including indirect Lessons from the Case
satisfaction without merit and awarded costs and impacts such as extended home The Bell case affirmed that while a cer-
Bell all of their claimed damages in the and field office overhead. Bell claimed that tain quantity of change orders is nearly
amount of $6,200,672 plus interest. The it did not intend to waive its right to re- inevitable on a construction project, there
awarded damages included: (1) $563,125, cover future delays and impacts caused by is some point where multiple changes cu-
the unpaid balance of the contract price; cumulative changes to its work. There were mulatively impact a contractor’s ability to
(2) $1,610,987 for unresolved changes; (3) more than 100 modifications, combining perform the work efficiently. In fact, Bell’s
$1,602,053 for the delays of remaining on 279 extra work orders issued after Mod 93, methodologies for quantifying the cumu-
the project after the original completion causing Bell further delay, disruption and lative impact survived the rigor of litiga-
date; (4) $2,058,456 in labor inefficiency loss of productivity. tion. However, in the end, Bell did not pre-
costs attributable to the cumulative impact The trial court sided with Bell, finding vail because the release language contained
of the changes; and (5) $366,051 as a 10 that waiver language in Mod 93 did not in Mod 93 limited Bell’s entitlement.
percent profit on the delay and labor inef- address cumulative delay and impact. The Bell’s experience points to several rec-
ficiency costs. appeals court, however, reversed, hold- ommendations for contractors and their
The court’s finding in favor of Bell, ing that modification language released advisers. Proving cumulative impact re-
however, did not create an automatic pas- the government from any and all liability quires excellent tracking of productiv-
sage for Bell’s subcontractors. Out of five attributable to Mod 93, including cumu- ity on the job. Documenting periods of
subcontractor pass through claims, the lative impact and delays. The appellate unimpacted performance is as impor-
court sustained only one. The key factor court’s opinion was not unanimous; it was tant as doing so when things go poorly.
in this decision was that the subcontrac- accompanied by a dissenting opinion from Technological advances make it easier to
tors did not submit any specific evidence Judge Newman, who found the findings maintain detailed daily logs, track cost
as to their damages and they did not and rulings of the trial court to be fully and time based on distinct activities. A
present any witnesses at trial. The suc- supported by the evidence and the law, and contractor’s very best performance data
cessful subcontractor whose claim was should have been affirmed. In the discus- can be used as a benchmark on the same
sustained, presented measured mile based sion, Judge Newman pointed that: or other projects. Reliance on expert and
calculations of damages and presented lay testimony combined with a well-orga-
witnesses at trial. …the cumulative impact and inef- nized compilation of the historical events
The Appeal ficiency problems did not arise right of the project will go a long way toward a
NIH appealed the Federal Claims court away, but burgeoned as changes con- successful outcome.
decision to the U.S. Court of Appeals for tinued to be required. The trial court Even the best record keeping and
the Federal Circuit. See Bell BCI Co. v. did not err in holding that the release analysis, however, can be rendered use-
United States 570 F.3d 1337 (2009). The terms in Mod 93 did not bar com- less by inadvertently signing a waiver or
appeals court focused its attention on one pensation for future events, for it was release. Thus, contractors should be very
particular modification, Mod 93 that Bell not disputed that Bell was told that careful when presented with waivers and
signed for costs and time incurred as a re- no more than 4-6 Extra Work Orders pay close attention to what is expressly
sult of a material change to the contract, should be expected, and that 279 Ex- covered by the waiver. When in doubt, it
under which NIH wanted to add an ad- tra Work Orders caused cumulative is always best to consult with an experi-
ditional floor to its five-story project. Mod disruption, delay, and inefficiencies. enced attorney.

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