The Jurisprudence of Contract Modification and the Changes Clause

Each year the federal government solicits bids for goods and services from private contractors, totaling billions of dollars. The contracts established under this procurement process differ in a crucial way from contracts between two private parties. When parties to a private contract mutually decide to change the terms of the contract, they can typically do so without difficulty. However, government contracts are subject to a more complicated and, some would say, rigid modification procedure. This paper will discuss the American jurisprudence that has only somewhat addressed the failure of the statutory and regulatory scheme to fully clarify the parameters of the standard Change clause, as well as some possible reforms that could be made to the contract change procedure.

Change clauses have been included in federal contracts since the early days of the country. Nash quotes an 1818 United States Army contract ordering 10,000 muskets and the wording, giving the government almost unqualified, unilateral authority to make changes to a contract is very similar to the Change clauses included in today's government contracts (qtd. in National Research Council (6). Not surprisingly, as Nash further notes, Change clauses are the most frequently litigated element of government contracts (qtd. in National Research Council 6).

In 1984, Congress passed the Competition in Contracting Act (CICA), which mandates that all government procurement contracts be subject to a competitive bidding process. (“[A]n executive agency in conducting procurement for property or services–(A) shall obtain full and open competition through the use of competitive procedures in accordance with the requirements of this title and the Federal Acquisition Regulation.” While CICA did specify that the contracting officer (CO) could modify a contract in certain situations, it failed to provide adequate guidance for the CO when deciding whether a modification was within his discretion (Federal Acquisition Regulation 42.102(a)). As the court in AT&T v. Wiltel (1205) noted, “CICA sets forth no standard for determining when modification of an existing contract requires a new competition or falls within the scope of the original competitive procurement.” AT&T would again come under fire for contract wranglings with the Justice Department and AT&T divestiture involvement.

While government contracts under CICA must include what is termed a Changes clause, the guidelines and language in the Federal Acquisition Regulation (43.101(a)(1)) provide little guidance. In essence, the Changes clause authorizes the CO to make unilateral changes to a contract, as long as such changes are “within the general scope of the contract” (AT&T v. Wiltel 1205). The Changes clause in a contract will also state that the contractor cannot protest the changes but can only request financial compensation for the changes made (Federal Acquisition Regulation 43.205). The phrase “within the general scope of the contract,” again, provides little guidance to the CO, as it can mean many things and, therefore, means nothing.

The Changes clause serves four purposes: giving the government operating flexibility; giving the contractor the opportunity to propose changes to the work plan, thereby optimizing efficiency and quality; authorizing the contracting officer to order additional work, as long as it is within the general scope of the original contract; and, providing a legal means for the contractor to pursue claims against the government (Cibinic, Nash and Nagle 380-381).

The government's ability to unilaterally make changes to a contract with a private business has been the subject of significant litigation. Even before the passage of CICA, government contracts included Changes clauses and, more than forty-five years ago, the Changes clause was called “the most important of all the standard clauses contained in government contracts” (Crowell and Johnson 550). However, courts have long struggled with the parameters within which the government must operate when exercising their right to unilaterally make changes to a contract.

Two distinct types of litigation comprise the CICA jurisprudence: lawsuits brought by contractors who refuse to agree to a contract modification after the contract had been awarded and litigation focused on the bidding process itself. And, two distinct tests have evolved from this litigation in order to determine whether a CO is permitted to make a unilateral contract change or whether the proposed change is such that the bid process must be reopened. The first test, developed in a string of cases brought by contractors, is the “cardinal change” test. A cardinal change is a change that is beyond the general scope of the contract. In essence, if the CO unilaterally orders a cardinal change, the government has breached the contract and the contractor is entitled to cancel the contract and obtain damages (Powell 378). A cardinal change would be one that is so drastic that it would require the contractor to perform duties that are “materially different” from those in the original contract (Allied Materials v. United States 563-564).

As Powell (378) notes, cardinal changes to government contracts usually consist of either a series of small changes during the period of performance, or a “single change that significantly alters the scope or character of the contract itself.” In Air-A-Plane-Corp. v. United States (1032), the court used as a standard “whether the 'modified job' was essentially the same work as the parties bargained for when the contract was awarded …” and held that it was not, given that there were approximately 1,000 design changes alone. However, the court was clear that the number of changes is not the sole factor in determining whether a cardinal change has taken place, but rather it is a question of fact that presupposes that each case will be analyzed individually in light of all the circumstances. The principle that the number of changes is not controlling was demonstrated in Wunderlich Contracting Co. v. United States, in which the court held that the extensive changes to a hospital were within the scope of the original contract, even though the changes required 50 percent more performance time since the newly designed hospital was not substantially different from the one in the original contract.

The second test is whether the proposed unilateral change is within the scope of the competition and is such that a reasonable bidder could have anticipated it. As the Court in AT&T v. Wiltel (1205) noted, “a modification generally falls within the scope of the original procurement if it falls within the contract’s changes clause.” Furthermore, “CICA does not require a new bid procedure for every change” (HDM Corp. v. United States 14-15). The court in HDM Corp. v. United States noted that “A broad original competition may validate a broader range of later modifications without further bid procedures” (15). The rationale behind this test is that if the proposed change is such that the bidder could have anticipated it, the change would have been incorporated into the bidder's submission, and if the contractual objective is broad, the bidder should have anticipated the possibility of changes.

Public contract case law is ultimately very practical and fact-based. While the common law is often aspirational and principles-based, public contract decisions tend to focus on specific facts and considerations of equity rather than on abstract rules. The court hearing this type of litigation looks to a number of variables, including type of contract (e.g. services, supply, construction), the nature of the dispute, damages and basis for damages and the nature of the governmental decision that is being contested before the judge (e.g. refusal to grant additional costs, contract termination).

Equitable adjustment of the contract price is one common theory underlying many of these cases. Equitable adjustment was first defined by the Court of Claims, the predecessor to the U.S. Court of Appeals for the Federal Circuit, whose decisions are binding on the administrative appeals process. In Bruce Construction Corp. v. United States (518), the court noted that equitable adjustment was

simply a corrective measure utilized to keep a contractor whole when the government modifies a contract. Since the purpose underlying such adjustments is to safeguard the contractor against increased costs engendered by the modification, it appears patent that the measure of damages cannot be the value received by the government, but must be more closely related and contingent upon the altered position in which the contractor finds himself by reason of the modification.

Ten years later, the court provided further clarification of what it means to keep a contractor whole. It is well established that the equitable adjustment may not properly be used as an occasion for reducing or increasing the contractor's profit or loss or for converting a loss to a profit or vice-versa, for reasons unrelated to a change. A contractor who has understated his bid or encountered unanticipated expense or inefficiencies may not properly use a change order as an excuse to reform the contract or to shift its own risk or losses to the Government” (Pacific Architects and Engineers Inc. v. United States 739).

It should also be noted that a request for equitable adjustment may be submitted at any time prior to the final payment to the contractor (Design and Prod. Inc. v. United States 168).

Our current system operates on a presumption that it is permissible for a CO to modify a contract with the exception of the two circumstances described above – a cardinal change, outside the scope of the contract or a change outside the scope of the competition, such that a reasonable bidder could not have anticipated it. Omer Dekel, however, in a law review article discussing modifications of government contracts, argues for the converse, a presumption of impermissibility, that a change to a procurement contract would be “impermissible and inappropriate,” unless certain considerations were addressed. The CO, however, would be given wide discretion based on these considerations (Dekel 416).

The considerations that Dekel suggests are as follows. The first consideration is whether the modification is permitted by the language of the contract's Changes clause. As Dekel (418) notes, if the contract itself expressly allows the Government to change the terms of the contract unilaterally, there should be no problem making the change. The next consideration is the “foreseeability of the need for changes by agency officials and bidders” (Dekel 420). The key issue here is whether the circumstances requiring the change could have been anticipated during the bid process. This is similar to the question of whether a reasonable bidder could have anticipated the need for certain changes during the bid process, an issue that goes to the fairness of the bid process to all of the bidders, as does this consideration. However, Dekel (420) includes the government in his calculations and infers that whether the modifications go forward should be based on a reasonable anticipation that changes would be necessary by both the contractor and the government.

The third consideration raised is what impact the modification will have on “fair competition and equal opportunity.” Under this consideration, the CO must decide whether there might have been more bidders, or better submissions, had the modification been included in the original contract. An affirmative response should result in a denial of the modification. (Dekel 421).

The next consideration is the timing of the requested change. If a request for modification is submitted close to the time the contract was signed, it is likely that the government should have anticipated the need for the modification when the original contract was drafted. In addition, if little, or no, work has been done on the project it is somewhat simple to just re-open the bidding process. Conversely, if a request for a modification is submitted during the latter period of the contract, it is likely that the requested changes are due to unforeseen circumstances. Dekel 421)

The CO should certainly review both the language of the contract and of the solicitation documents. If the Changes clause is clear about the possibility of future modification, in language that a bidder can understand, the value of a fair and open bid process has likely been met. However, if the Changes clause does not allude to possible future changes or the changes requested are clearly antithetical to the language of the contract, the CO should probably reject the proposed modifications (Dekel 422). In addition to the language of the contract, the CO should assess the type of contract that was awarded. For example, a detailed, complex, long-term contract could probably be expected to result in some necessary request for modification, since it's impossible to include all eventualities in the original contract (Dekel 424-425).

In addition, the CO should address the scope of the requested modifications, since even small changes to a contract can upstage the contract itself. As Dekel (422) notes, “The initial assumption should be that the modification to the contract remains secondary to the original contract. If the modification is so material as to take center stage while the prime contract becomes secondary, then the tendency should be to disallow the modification and to require the solicitation of new bids.” Related to the question of the scope of the modification, is the relationship of the requested change to the original contract. Where a connection can be demonstrated and where the modification is a clear extension of the original contract, as well as being necessary, it is likely a situation where the modification should be granted. If, however, the original contract is for a certain product, such as a computer system, and the modification calls for the purchase of office furniture, it would be more difficult to find the necessary connection. Dekel 423).

Likewise, the CO must determine whether the modification, if it stood alone, would require a solicitation of bids. Dekel (424) postulates a situation where the proposed change is in response to an urgent situation, in which the contract could be awarded without a competitive bidding process. This situation lends support to granting the modification. The CO should also assess to what extent the change is necessary in order to fulfill the contract and to what extent it would improve the contract but is not necessary for its fulfillment. The CO should also distinguish between an essential and non-essential contract. While the failure of a non-essential contract will not be critical to the government, the failure of an essential contract may very well cause serious problems, and that possibility should take precedence over the values of fair competition, equal opportunity and economic efficiency (Dekel 423).

The efficiency of the change is separate from but related to, whether the change is truly necessary, as discussed above. If the change cannot either be separated from the original contract, or the change is necessary in order to fulfill the original contract, then the CO should lean towards granting the modification (Dekel 424). It must also be determined whether the modification can be formulated as a new contract and put out to bid, thereby serving the interests of fair and equal opportunity (Dekel 424).

Lastly, Dekel suggests a review of the motivation for the change. This consideration recognizes the fact that there could conceivably be collusion or graft or, though less serious but still illegitimate motives, laziness or inflexibility on the part of one or both of the parties. In any of these instances, the modification should be rejected out of hand. Likewise, if the CO determines that the modification is “not essential to the successful completion of the project,” it should likewise be rejected. (425)

There are two ways of looking at Dekel's suggested alternative scheme. One way is to conclude that making the contract modification process more objective, even though some of the considerations are fairly subjective, would increase the fairness of the process. Conversely, one could conclude that expanding the review criteria would open up the modification process to more appeals and court litigation since there would be multiple factors on which to base an appeal.

There is likely truth in both of these arguments. However, the fact of the matter is that Dekel's suggested considerations go right to the heart of the values on which the CICA process is based – fair competition, equal opportunity and economic efficiency. An additional value, transparency, would be greatly increased if a CO was required to articulate his or her findings on each of the considerations suggested above.

In conclusion, it is not argued that the federal government should engage in a pure commercial contracting regime, like private contracting. However, the lack of clarity in the statute and regulations governing contract modifications, although being given some shape and definition by the courts, is still vague on many levels. In addition, the at times arbitrary and subjective nature of CO decisions on modification does strongly suggest that the system needs some significant changes.

A question remains, however: why is the public contracting system so different from the traditional legal system of private contracting between individuals? Is it because there is a power imbalance between the private contractor and the federal government, or because the government tends to complicate everything or maybe because the process, as it is, includes multiple decision-makers so that no one person really needs to take responsibility for decisions. While it might be a bit of each of these realities, the underlying reason seems to be exemplified in the way the United States thinks of itself as a country.

“Historically, the Government has behaved differently from private enterprise, and the courts reinforced the distinction between private and Government contracts. This distinction exposes a fundamental tension that underlies the ongoing evolution of federal Government contract law, policy, and case law. Compelling arguments favor both the distinctions and the similarities between Government ant private purchasing. As [observed], the US embraces both the traditions of ‘exceptionalism’ and ‘congruence.’ The exceptionalist view of Government contracting emphasizes the unique status, attributes, and needs of the federal government. The congruent view seeks to assimilate the government’s contractual rights and duties to those of private entities. The effort to buy more commercial items and incorporate commercial practices signals a resurgence of congruent-type policy-making. Yet the exceptionalist constraints, which impede the implementation of a truly commercial government purchasing regime, cannot be ignored” (Schooner 40-41).

Works Cited

Air-A-Plane-Corp. v. United States, 408 F.2d 1030 (Ct. Cl. 1969). Web.

Allied Materials & Equipment Co. v. United States, 569 F.2d 562, 563-64. Web.

AT&T Communication Inc. v. Wiltel Inc., 1 F.3d 1201 (Fed. Cir. 1993). Web.

Bruce Construction Corp. v. United States, 324 F.2d 516, 163 Ct. Cl. 97. Web.

Cibinic John., Jr., Ralph. C. Nash, Jr., and James F. Nagle. Administration of Government Contracts. 4th ed. (2006) Washington, D.C.: Wolters Kluwer. Print.

Competition in Contracting Act (CICA) of 1984, 41 U.S.C. § 253(a)(1)(A) (2000). Web.

Crowell, Eldon and W. S. Johnson. “A Primer on the Standard Form Changes Clause.” William and Mary Law Review 8.4 (1967): 550-572. Print.

Design & Prod. Inc. v. United States, 18 Cl. Ct. 168 (1999). Web.

Federal Acquisition Regulation. Vol. 1, Issued by the General Services Administration, Department of Defense and National Aeronautics and Space Administration, Vol. 1. (March 2005). Web.

HDM Corp. v. United States, 69 Fd. Cl. 243 (2005). Web.

Nash, Ralph C., Jr. Government Contract Changes (1975) Washington D.C.: Federal Publications. Print.

Pacific Architects and Engineers Inc v. United States, 49 F.2d 734 (1974). Web.

Powell, George. E., Jr. “The Cardinal Change Doctrine and Its Application to Government Construction Contracts. Public Contract Law Journal 24 (1995): 377. Print.

Schooner, S.L. “Commercial Purchasing: The Chasm Between the United States' Government’s Evolving Policy and Practice. GW Law Faculty Publications & Other Works (2002) Paper 103. Web.

Wunderlich Contracting Co. v. United States, 173 Ct. Cl. 983, 351 F.2d 956 (1965). Web.