On a $28 million infrastructure contract, a contractor suffered an $11 million loss because of high charges by the utility companies for their part of the installation. The contractor, it turned out, got no remedy in court and, therefore, no means of recouping this major loss.


The project was for the U.S. Army Corps of Engineers at Ft. Bliss, Texas. The infrastructure work included the demolition of sections of existing utility systems and the construction of new electric, water, sanitary, communications and natural gas systems.


What made the circumstances of the contract somewhat unusual was the fact that the utility companies had only recently become privatized. Whatever experiences the contractors had with the utilities, there was no predictability as to how these companies would operate now.


Even though the Army Corps had entered into long-term contracts with these utility companies to supply service to Ft. Bliss, it made no representations about these companies’ business approach. Instead, contractors who bid on the project were notified that “contractors shall be responsible for negotiating and finalizing utility system work with the utility providers.”


The bidders asked the Army Corps whether this notice meant that they should base their bids on “costs of work typically performed by utility owners.” The Army Corps did not respond.


Two of the bidders obtained a quote from the water company for that portion of the work, but it was not clear whether the work could be subcontracted out to a company other than the water utility. The bidders also contacted the electric utility, which said that the Army Corps’ design was unacceptable and that it could not provide a quote until after the bidding on the project was closed. As with the water company, the electric company did not say that it alone could perform the utility work. The bidders asked the Army Corps to extend the bidding date, and the corps did not reply.


On the morning of the bid-closing date, the bidders learned that the electric utility would not allow any other contractor to perform the work and that it intended to redesign the electrical portion of the project.


Despite these uncertainties in pricing, the successful bidder went ahead and submitted its proposal, which was based on reasonable estimates for the electric, water and gas utility work. The Army Corps’ internal estimate must have been similar, since no question was raised about underestimating.


Two months later, the electric and water utilities gave their final pricing. For electric, the price was $3 million over budget, and it was $5.5 million over budget for water. It appeared that the two utility companies were making use of their monopolistic power.


Did the contractor have any right to a request for equitable adjustment against the Army Corps? This question was posed in the October 2014 case of Tug Hill Construction Inc.


The combined cost for the electric and water utilities was $20.5 million. Given Tug Hill’s estimate for the entire job at $28 million, it might have made practical sense for the Army Corps to have contracted directly with the utilities, especially since the utilities required the work to be done only with their own forces (or their own subcontractors). Then again, it appears that the Army Corps may not have been aware of this restriction. In any event, the Army Corps’ decision to use a general contractor was within its authority.


Did the Army Corps have “superior knowledge” that the utilities would not permit the contractor to perform the work with its own subcontractors or that the utilities would have a pricing structure double the reasonable, commercial value of the work? That theory could not be proven. Tug Hill argued that the Army Corps had breached an implied contract covenant (promise) of good faith and fair dealing. The argument was that the Army Corps was in a unique position, because of its own contracts with the utilities for services to the installation, to assist the contractor in its negotiations.


The board disagreed. Aside from whether the Army Corps could have helped, it did not have any contractual “right” or legal power to induce the utilities to reduce their prices or to allow others to perform the utility work. In addition, the Tug Hill contact with the Army Corps “nowhere implies that the government was required to intervene in the negotiations.” (Emphasis was added.)


Next, Tug Hill argued that the Army Corps breached the covenant of good faith and fair dealing by not getting information about, or commitments from, the utilities before it went out to bid for the project. That argument seems to be fair, as the Army Corps was uniquely placed to have gotten some agreements in advance from the utilities and could have helped avoid surprise to the bidders later.


On this point, the board stated the rule that the covenant of good faith only arises once a contract is signed. It does not apply to action, or inaction, of the government before the contract is awarded. The “good faith” concept does not cover actions taken during contract formation (request for bids through contract award).


In the decision, the board did some hair-splitting; it ruled that Tug Hill had not “demonstrate[d] that the government mandated that it hire the utility providers to perform the utility systems work.” (Emphasis was added.) This holding was in response to an argument that there was a “constructive change” by the Army Corps as to who would perform the work.


Literally speaking, this ruling is accurate, but the Army Corps had contracted with the utility companies and required the contractor to negotiate with them.


In a broad sense, the conundrum in Tug Hill has similarities to issues surrounding proprietary specifications. (See “I Didn’t Know There Was Only One,” ELECTRICAL CONTRACTOR, November 2014). In both, the government implicitly selects a sole source without expressly saying so. With proprietary specifications, it is a sole-source product; with Tug Hill, it was a sole-source subcontractor/service. In both, there is an obvious restriction of competition and a resultant increased cost. In both, there is a nasty surprise for the contractor.


There is also a tendency for judges in both circumstances to blame the victim—that is, had the contractors more deeply investigated prebid, they might have discovered the hidden problem and/or decided not to take the risk of bidding. With Tug Hill, the unfairness of the decision lay in the fact that the government did not have to pay for the cost of the services that it required. The equity concept in such a circumstances is called ‘unjust enrichment,” a theory of recovery that typically requires proof of fraud, duress or the taking of undue advantage, elements not present in Tug Hill.