Federal Claims Court Approves Contractor’s Use of Blue Book Rates to Calculate of Standby Equipment Costs in Constructive Change Claims Against the Navy

Construction Co, Inc. v. United States
2008 U.S. Claims LEXIS 137 (May 21, 2008)

The United States Court of Federal Claims discussed the measurement of equitable adjustment for standby equipment costs in a case involving the United States Department of the Navy.

Metric Construction Co. entered into two contracts with the Navy to perform construction work on the small island of San Nicolas off the coast of California. Under the first contract, Metric agreed to make improvements and repairs to the Navy’s airfield runway on the island. The second contract called for repairs to certain of the islands roadways and storm drainage systems. Certain conditions on the island created logistical challenges for Metric in performing the work. These included limited landing areas for barges carrying equipment, bad weather, and the existence of a salt water spray over the site.

In the course of performing its Work, Metric encountered certain difficulties that impacted its work either by delaying it or adding costs not accounted for in the contract sum. Metric sued the Navy to recover the costs associated with these delays and added contract amount, asserting that the Navy’s actions changed the contract beyond what was expected. The Court found that Metric could recover from the Navy on three of its claims, each of which constituted a constructive change to Metric’s contracts.

Specifically, Metric was entitled to recover for (1) changes made to the barge landing system by the Navy which often made it impossible for Metric to land its barge and unload its equipment; (2) work performed at the Navy’s direction which contradicted the description of the work in the contract specifications, and which created extra work for Metric after it had already started performing according to the contract specifications; and (3) cleanup by Metric required by the Navy of contaminated soil much of which came from the work of other contractors or leaks and spills on the roads and runways not caused by Metric. The Court found that these constituted constructive changes to Metric’s contracts which entitled it to an equitable adjustment for the added costs and delays, but only to the extent specifically caused by such changes.

The most significant element of the equitable adjustment due Metric related to standby equipment costs The issue before the Court, then, was the appropriate method for calculating the standby rates to be applied to Metric’s equipment rendered inactive for periods of time due to the Navy’s constructive changes. Because Metric owned most of the equipment it used on the projects, direct leasing costs were not available. Therefore, Metric and its experts used rates from the Dataquest Blue Book to substantiate its costs. The Navy, however, argued that the Blue Book was not appropriate for calculating Metric’s costs.

The Court noted that a statute was incorporated into the parties’ contracts which called for a hierarchy means of deriving ownership and operating costs for construction equipment, starting with actual-cost data and moving towards “predetermined” schedules or rates. First, the Court found that using actual cost data was not possible because Metric had not broken its equipment costs down into identifiable costs for each piece of equipment. Thus, the Court turned to whether the Navy had agreed to use a particular schedule of construction use rates, such as the Blue Book. Although there was no written agreement specifying use of the Blue Book to determine equipment costs, the Court determined that the Navy’s use of Blue Book values in prior claims on the same projects was probative of the parties’ understanding of contractual terms, and ultimately held that the evidence supported the existence of such an agreement to use the Blue Book rates for owned equipment.

Furthermore, the Court discussed the standby rates to be used for Metric’s older equipment. Although the Navy attempted to use calculations based on a manual that was not agreed upon by the parties, the Court found that this was not appropriate, and noted that fully depreciated equipment was still entitled to reasonable ownership costs due to costs of repairing and maintaining the equipment. Further, the Court noted that the Blue Book rates used by Metric for its older equipment sufficiently took into account its age and the depreciation due to its age.

Finally, the parties disputed whether it was appropriate to make an adjustment for the Blue Book rates for the location of the work. Specifically, Metric argued that a severity factor was appropriate because the equipment was being used on an island affected by wind-blown corrosive salt spray. The Navy contended that the regional adjustment factor taken into account in the Blue Book rates already accounted for these conditions. The Court determined that the regional adjustment factor incorporated into the Blue Book rates were inappropriate here, however, as they assumed factors based on Southern California, which would have actually reduced, rather than increased, the rates. Because of the island’s remote location frequented by winds and surf, the islands small size, and the fact that the work took place on the periphery of the island, Metric’s equipment was constantly exposed to a corrosive environment. Accordingly, the Court applied a severity factor (of 10%) to the Blue Book standby rates.

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