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Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers (2013)

Chapter: 4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS

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Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
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Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
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Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
×
Page 42
Page 43
Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
×
Page 43
Page 44
Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
×
Page 44
Page 45
Suggested Citation:"4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS." National Academies of Sciences, Engineering, and Medicine. 2013. Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers. Washington, DC: The National Academies Press. doi: 10.17226/22559.
×
Page 45

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39 The guidance and recommendations in this document primarily stem from best prac- tices and lessons learned. They are based on a review of published reports, guidance documents, and contracts and specifi cations, as well as discussions with subject matter experts from agencies and industry. However, in implementing performance specifi ca- tions, users should also be aware of the legal precedents that may affect their enforce- ability. This section provides an additional view of performance specifi cations—that of the courts. A substantial number of reported decisions address the enforceability of perfor- mance specifi cations. Most of the cases are based on disputes involving federal gov- ernment contracts and have been reported in decisions by various agency Boards of Contract Appeals (BCAs) and the U.S. Court of Federal Claims. The following is an overview of the most common topics discussed in the cases. 4 LEGAL PERSPECTIVE OF PERFORMANCE SPECIFICATIONS Chapter Objectives This chapter • Presents an overview of key court decisions addressing the enforceability of perfor- mance specifi cations; • Discusses the application of the Spearin doctrine to performance specifi cations; and • Addresses possible lines of defense for failing to meet performance specifi cations.

40 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS DESIGN VERSUS PERFORMANCE SPECIFICATIONS Whether a contractor’s performance is governed by a design (i.e., prescriptive or method) or by a performance specification is critical to determining liability for project defects. When an owner specifies the material and character of the work by using design (or method) specifications, the warranty by the owner that as long as the con- tractor performs the work as specified, the contractor will not be responsible for the consequences of design defects is implied (United States v. Spearin). This long-standing principle, called the Spearin doctrine, has been a cornerstone of construction law in the United States for almost a century and has helped shape current practices in construc- tion contracts and project management. As the construction industry has moved to performance specifying, much discus- sion has ensued over the application of the Spearin doctrine to performance specifica- tions and the consequent liability of the owner. Many of the cases before the BCAs and the Court of Federal Claims evaluate whether the particular specification in dispute is a design specification, performance specification, or a mixture of the two. Generally speaking, a design specification is one that describes in precise detail the manner and method of the construction work to be performed and from which the con- tractor is not allowed to deviate (J. L. Simmons Co., Inc. v. United States). Courts and BCAs refer to these specifications as road maps, cookbooks, and similar adjectives. In essence, they mean that a design specification dictates how the contractor is to do the work. In contrast to design specifications, a performance specification sets forth an objective, result, or standard, and the contractor has discretion as to the means of achieving it (Kiewit Construction Co. v. United States). In classic performance speci- fying, the owner does not state design, measurements, or other specific details and simply states the expected result. Also, commonly, a particular specification can have a mixture of design and per- formance elements. For example, if a bridge project involves the driving of concrete cylinder piles, a performance specification might say, “Drive the 50-ft diameter piles to a minimum tip elevation of –55 ft and to a bearing capacity of 650 tons.” A mixed design and performance specification might add requirements such as hammer size, cushion replacement, jetting limitations, maximum stress levels in driving the piles, and similar restrictions. The distinction between a design and performance specification is critical in assess- ing liability. If a contractor complies with a design specification that does not work, then, under the Spearin doctrine, the contractor is given cost and time relief. However, if the specification is considered a performance specification, then the contractor is responsible for achieving it, regardless of cost. Although this would seem to be a rela- tively simple concept, the problems come when an owner prescribes a mixed design and performance specification and then performance cannot be achieved under the design constraints established by the owner. For example, consider the bridge scenario. Assume that the specification precludes any type of prejetting. When the contractor starts driving the piles, it finds that it is exceeding the maximum stress levels and the piles are starting to crack at elevations

41 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS well above the minimum tip elevation. Assume that the owner and contractor agree that the solution is to prejet to within 5 ft of the minimum tip elevation. That opera- tion costs the contractor more money and time. The contractor would argue that the owner’s specifications were defective in that the design requirements led the contractor to believe it should not price prejetting operations. If the owner believed that it had drafted a performance specification, then it would disagree with the contractor’s claim for money and time. Ultimately, because the owner constrained the contractor’s ability to do the work by establishing some “cookbook” requirements, the owner’s argument would likely fail. Numerous reported cases evaluate this type of issue. A recent design-build case, White v. Edsall Construction Company, Inc., explains the principle (see, generally, Loulakis 2002). The contract involved the construction of an aviation support facility for the U.S. Army, and the issue was the design of the storage hanger tilt-up canopy doors and truss. The specification required the design-builder to use a three-pick- point system to lift the doors. The design-builder eventually concluded that the three- point system was deficient and made a claim for its costs in modifying the lifting system. The Army argued that the specification was a performance specification and specifically argued that liability for the deficient three-pick-point system was to be borne by the design-builder through the following note, which was on the canopy door drawings: Canopy door details, arrangements, loads, attachments, supports, brackets, hardware, etc. must be verified by Contractor prior to bidding. Any conditions that require changes from the plans must be communicated to the Architect for his approval prior to bidding and all costs of the changes must be included in the bid price. The Armed Services Board of Contract Appeals (ASBCA) found the three-pick design system to be a defective design specification and rejected the disclaimer lan- guage. The ASBCA found that the Army had warranted that the door load could be evenly distributed to the specified three pick points and that the disclaimers could not be read to eliminate this warranty. It said that if the number of picks was not a design specification, then “bidders would have been free to select the method of performance, and it would not have been necessary for them to seek the architect’s permission to make changes from the plans.” Importantly, the ASBCA stated that the design-builder had no prebid obligation “to ferret out if the Government’s three-pick point design would provide the proper load distribution.” Given the number of cases that have considered this issue, the owner clearly bears the risk of a mixed design and performance specification that does not work. Efforts by owners to avoid this risk by using creative labels have not been successful. These efforts include (a) calling a design specification “performance specification require- ments,” (b) stating that the design specification is “discretionary,” (c) using disclaimers of liability, and (d) saying that the design specification is “for guidance purposes only.” Stated simply, the BCAs and Court of Federal Claims—as well as state courts—view the Spearin doctrine as an important right for contractors, and they have been reluc- tant to accept the arguments of owners that would compromise this right.

42 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS These cases involved design-build delivery, an approach that commonly assumes that control and liability for design is shifted from the owner to the contractor. In reality, design-build or design-bid-build performance specifications may contain a mix of design requirements (or constraints) and end-result performance requirements. The design constraints may restrict the contractor’s ability to provide a preferred or lowest-cost solution but should not prevent the contractor from meeting the required performance. A simple example of a design constraint is prohibiting the use of steel construction for a bridge to reduce future maintenance cost. As a best practice, when drafting specifications containing design constraints and end-result performance requirements, the drafter should clearly define roles and responsibilities and perfor- mance requirements and should ensure that design requirements or restrictions do not prevent a contractor from reasonably meeting the required performance. DEFENSES TO MEETING A PERFORMANCE SPECIFICATION In numerous cases pure performance specifications have cost contractors more money than expected, and they have sought relief. The cases are clear: when a contract is properly written in terms of a clear performance specification with end-result require- ments, courts will not hesitate to find the contractor liable for failing to meet such specifications. Consider Utility Contractor, Inc. v. United States, in which a contractor was to design and build a flood control system to collect rainwater along a creek in Oklahoma and prevent the construction area from flooding. Rainstorms caused the creek to overflow temporary cofferdams installed to keep the construction area dry. The contractor alleged that the government had failed to identify detailed procedures in the contract for protecting the permanent work during the construction phase. The court rejected the claim based on its reading of the contract, taken as a whole, as requiring the contractor to possess sufficient hydrological expertise and construction skills to protect its unfinished work. Despite this general principle, questions remain as to how far this obligation will actually extend when the contractor is confronted with factors beyond its rea- sonable control. In the few cases on this subject, two lines of defense have surfaced: impossibility or impracticability of performance and owner interference. Impossibility and Impracticability of Performance If an owner creates a performance specification that is, for technological or financial rea- sons, impossible or impracticable to perform, courts may excuse the contractor’s non- performance. The factors to be considered in establishing impossibility are (a) whether any other contractor was able to comply with the specifications, (b) whether the speci- fications require performance beyond the state of the art, (c) the extent of the con- tractor’s efforts to meet the specifications, and (d) whether the contractor assumed the risk that the specifications might be defective (Oak Adec, Inc. v. United States). Commercial impracticability is a subset of the legal doctrine of impossibility; it excuses a party’s delay or nonperformance when the “attendant costs become excessive and unreasonable by an unforeseen supervening event not within the contemplation of the parties at the time the contract was formed” (L.W. Matteson, Inc. v. United States).

43 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS The argument is that by accepting a performance specification, the contractor has represented to the owner that the specifications are attainable and subject to neither defense. However, courts have considered this matter more precisely and have evalu- ated (a) the precise contract terms agreed on by the contractor and (b) the relative knowledge of the owner and contractor regarding the “impossible specification.” In Colorado-Ute Electric Association v. Envirotech Corp., the design-builder ( Envirotech) agreed to meet certain performance requirements in its contract to pro- vide the owner (Colorado-Ute) with a hot-side electrostatic precipitator at a coal-fired electric power plant. Specifically, Envirotech agreed to comply with state air quality standards requiring that emissions opacity not exceed 20% and warranted that it would bear the cost of all corrective measures and field tests until continuous com- pliance could be achieved. Envirotech failed to achieve continuous compliance with the performance requirements and claimed that such compliance was impossible to accomplish. The court held that Envirotech had expressly warranted that it could pro- vide Colorado-Ute with a satisfactory precipitator and thus assumed the risk of impos- sibility. The court stated, “[Envirotech’s] impossibility defense is inconsistent with its express warranties and cannot be employed to avoid liability.” Similarly, in Aleutian Constructors v. United States, the Court of Federal Claims held that by altering the owner’s initial design specifications for the design features at issue, the assumption by the contractor of the risk that performance under its pro- posed specifications may be impossible is implied. In this case, the contractor ( Aleutian) agreed to construct an airplane hangar and dormitory building for the U.S. Air Force’s optical aircraft measurement program at Shemya Air Force Base, Alaska. The area is known for its extreme weather conditions and high winds. During construction, Aleutian obtained the government’s approval to change the design of the roofing system provided that it warrant the materials and workmanship for a 5-year period and verify that the proposed design would withstand a wind uplift pressure of 80 psf. Soon after installation, the roofing system failed and Aleutian was forced to make substantial repairs and modifications to the roofing system. Aleutian filed a claim to recover the repair costs, alleging defective specifications and impossibility. The court rejected the claim and reasoned that when a contractor persuades an owner to change its design to one proposed by the contractor, the contractor assumes the risk that performance under its proposed design may be impossible. Accordingly, by assuming responsibility for the design, the contractor assumes liability for all damages and losses arising from the inability of the design to meet the owner’s performance goals. Another instructive case in this area is J. C. Penney Company, Inc. v. Davis & Davis, Inc. The issue involved the quality of workmanship of certain sheet metal and coping work. The project specifications provided that the work must “be true to line, without buckling, creasing, warp or wind in finished surfaces.” The owner refused to accept the work because it did not comply with the specifications. The design-builder did not dispute the assertion that the work did not comply with the specifications but instead claimed that it was impossible to comply with the specifications. The court found that impossibility is not a basis to allow the design-builder to recover its addi- tional costs from the owner for attempting to comply with the specifications. The

44 STRATEGIES FOR IMPLEMENTING PERFORMANCE SPECIFICATIONS: GUIDE FOR EXECUTIVES AND PROJECT MANAGERS court reasoned that the specifications, although impossible to meet, were negotiated by the parties at arm’s length. Therefore, the owner was totally within its rights in refus- ing a product that did not meet all of its bargained-for specifications. As evident from these cases, one of the biggest hurdles that contractors face rela- tive to these defenses is the argument that they have assumed the risk of meeting the performance specification. This is particularly true in a design-build context because the contractor may actually have participated in the development and writing of the specification. Therefore, while these defenses are theoretically available to a contrac- tor, few tribunals have accepted the arguments. Owner Involvement and Interference An owner can potentially jeopardize its right to shift the risk of achieving performance specifications to the contractor by interfering with the design or construction process. Consider, for example, Armour & Company v. Scott, which arose out of a design- build contract for the construction of a meat packing plant. The court found that the owner became so actively involved in the design process by modifying the electrical and mechanical systems and ultimately increasing the facility size that the owner as- sumed the role of a de facto partner of the design-builder. The substantial interferences constituted a breach of contract by the owner. Sometimes, despite the best efforts of the owner to develop a performance speci- fication and enable the design-builder to meet it, circumstances related to owner involvement can affect the single point of responsibility. Consider, for example, Allen Steel Co. v. Crossroads Plaza Associates, which involved a commercial facility in Salt Lake City, Utah. In response to an owner’s solicitation of design-build proposals for structural steel work, a contractor submitted in its proposal three structural design alternatives. However, the proposal specifically stated the following: This proposal is offered for the design, fabrication, and erection of the Struc- tural Elements only for the tower and mall. . . . Owner’s engineer is to check this design and make changes if necessary to enable him to accept overall responsibility for the design. Changes that effect [sic] quantity, weight, or complexity of structural members will require an adjustment in price. The proposal was accepted, and the contractor was directed to prepare detailed plans for steel fabrication on the basis of its plans. During the course of performance, however, inspectors from Salt Lake City stopped construction because of what they perceived as structural defects. The owner retained its own engineer to correct the defect. Steel had to be torn down to remedy the problem, resulting in delays to the project and substantial cost overruns. The owner charged the contractor for the added costs, prompting litigation between the parties. The sole issue in the case was whether the contractor had effectively disclaimed responsibility for design defects by placing responsibility for the design within the control of the owner through its proposal. The court found that although the owner had only provided general design parameters for the structural steel, the contractor had effectively disclaimed its responsibility because it had provided a design for purposes of the bid and transferred the risk of verifying adequacy of the design to the owner.

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TRB’s second Strategic Highway Research Program (SHRP 2) Report S2-R07-RR-2: Strategies for Implementing Performance Specifications: Guide for Executives and Project Managers is designed to provide a broad overview of the benefits and challenges associated with implementing performance specifications. The guide explores various cultural, organizational, and legal considerations that can affect the successful implementation of performance specifications. Project selection criteria and procurement and project delivery options are also addressed.

The SHRP 2 Renewal Project that produced Report S2-R07-RR-2 also produced:

  • Framework for Performance Specifications: Guide for Specification Writers, which presents a flexible framework that specifiers may use to assess whether performance specifying represents a viable option for a particular project or project element. If it is indeed a viable option, the Guide discusses how performance specifications may then be developed and used to achieve project-specific goals and satisfy user needs;
  • Performance Specifications for Rapid Highway Renewal, which describes suggested performance specifications for different application areas and delivery methods that users may tailor to address rapid highway renewal project-specific goals and conditions; and
  • Guide Performance Specifications, which includes model specifications and commentary to address implementation and performance targets (for acceptance) for 13 routine highway items. Agencies may adapt guide specifications to specific standards or project conditions. The commentary addresses gaps, risks, and options.
  • A pilot study, in partnership with the Missouri Department of Transportation, to investigate the effectiveness of selected quality assurance/quality control testing technologies.

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