Constructive Change: Friend or Foe?

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Guest Speaker: Vincent Padilla, Esq.

!! Arizona State Bar !! BA, Law: University of Southern California !! Boeing, Honeywell Counsel !! Faculty Cal State Fullerton !! UCLA Extension

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!! Changes •! Buyer Directed vs. Constructive Change

!! Constructive Change Impacts !! Best Practices to Control Constructive Change

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!! Contracting O�cer directed Changes: •! Change order issued by Contracting O�cer •! Contractor responds with a change proposal or noti�cation of change •! Parties negotiate a contract adjustment to price, schedule, etc.

CCoonnssttrruuccttiivvee CChhaannggeess !! Any act or omission by Government or its representatives that impacts

Contractor’s performance !! Begins with Contractor’s discovery of the change and notice to the

Contracting O�cer of the change •! Must show a part of the contract that was changed •! Must show an act or omission by the Buyer that changes the contract •! Must show an impact (higher cost, schedule impact, etc.)

Constructive Change Examples

Constructive Change Examples

!! Seller is designing a product according to contract requirements. There are several potential technical solutions. Buyer’s technical personnel disagree with Seller’s chosen solution and direct that they use an alternate method. Changing methods will a�ect both cost and schedule.

Constructive Change Examples

!! A construction company is responsible for excavating a site for a building’s foundations. Buyer’s speci�cation says that the land is a sand/clay mixture. In fact, the land includes a large layer of volcanic rock. This will impact the cost and time to excavate.

Constructive Change Examples

!! The contract says that the Government will provide Seller with on-base o�ce space in order to perform the contract. On the start date, Contractor’s personnel arrive to start work but are told the space will be unavailable for another month. Contractor will either incur costs with idle time or to transport the team back and forth

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FFAARR 5522..224433--77 NNoottiiccee RReeqquuiirreemmeennttss 1.! Date, nature, and circumstances of the conduct regarded as a

change; 2.! Name, function and activity of each Government individual

and Contractor o�cial or employee involved in or knowledgeable about such conduct;

3.! The identi�cation of any documents and the substance of any oral communication involved in such conduct;

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4.! The basis of acceleration of scheduled performance or delivery if this is the issue; 5.! What contractual elements are a�ected by the change:

I.! Contract lines items a�ected by the change; II.! Labor and/or materials that have been added, deleted or wasted by the change; III.! The delay, disruption and impact on the manner and sequence of previous and

continuing performance; and IV.! The estimated adjustments to contract price, delivery schedule and other provisions

a�ected by the change 6.! Contractor’s estimate of a Government response deadline that will minimize cost, delay or

disruption of performance

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GGoovveerrnnmmeenntt 1.! May need to identify additional contract funding (May result in program de-scope

to remain within available funding) 2.! Suggests an inability of the Government to monitor actions of its personnel 3.! May demonstrate a Government failure to perform its contractual requirements

(late funding, de�cient GFX) 4.! May demonstrate a lack of clarity in contract requirements 5.! Could result in dispute 6.! Damage to Government-Contractor working relationship

CCoonnttrraaccttoorr !! Additional Government funding may not be available (May result in program de-

scope to remain within available funding) !! Risk of cost allowability issues depending on where the costs for the change have

been charged !! Suggests an inability to manage to the contract’s requirements !! If Government disagrees that this is a constructive change, costs will be an overrun !! Could result in a dispute, leading to legal costs, etc. !! Damage to Government-Contractor working relationship

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1.! Avoiding unforeseen changes requires oversight by both parties

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2.! Buyer should require that Seller has a robust change management process o! This should include a change management board that manages the project’s

baselines: •! Technical •! Schedule •! Cost

o! Contractor should make no changes (or incurs no costs) until the board approves the changes

o! Ideally, Buyer should be advised of changes being considered at the change management board or have non-voting participation

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3.! Contractor should segregate change costs or be prepared to use company funds to avoid potential cost allowability issues

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