Beware hazard compensation

The ability to assess and manage risks is an important skill for any contractor. It is especially important in government contracting, where some risks can be particularly difficult to gauge, especially when military conflicts and quasi-military hostilities may be involved.

Fortunately, there are special government contract clauses that give the government the responsibility to absorb adverse impacts of possible military actions on contract performance. Unfortunately, however, most routine government contracts do not include such special provisions, and the parties have to rely on standard contract provisions to apportion the cost and schedule impacts of unanticipated war-like conditions.

Not surprisingly, there is a fairly large body of case law in this area. In Wunderlich Contracting Co. v. United States, a contractor sought an equitable adjustment to a government contract for the delays and disruptions caused by the outbreak of the Korean War. The war commenced shortly after work had begun and continued through the duration of the project. In response to the war, the government awarded numerous contracts to be performed on an expedited basis in the same area as Wunderlich's contract, causing significant increases in the price of materials and equipment and in workers' wages.

In that case, the Court of Federal Claims denied the contractor's claim for the added costs on the grounds that the government's actions were taken in its official sovereign capacity, for which it was not liable to the contractor.

Similarly, in Keang Nam Enterprises, Ltd., a military contractor working in Vietnam sought compensation for tools and materials lost when it was forced to evacuate the job site during the 1968 Tet offensive. The contractor sought compensation on the theory that the military offensive was a changed condition under the contract. However, the Armed Services Board of Contract Appeals (ASBCA) denied the claim because anyone working in Vietnam at the time had to know that military action was a risk.

More recently, in T&G Aviation Inc., a government contractor sought compensation for the loss of an airplane and damage to another. The planes, which had been used as part of U.S. government aid contracts to spray locusts in northern Africa, were fired on by Moroccan rebels. According to the ASBCA, the U.S. government had no liability for the incident under normal contracting rules, and the contractor should have been aware of the potential risk. The ASBCA concluded that nothing in the contract shifted responsibility for the risk to the government.

Clearly, it can be a difficult task to shoehorn war-related risks under normal, boilerplate contract terms. For this reason, any contractor who plans to do work for the government in areas likely to be affected by hostile military action should make every effort to get the government to include appropriate special provisions in the contract.

Peckinpaugh is corporate counsel for DynCorp in Reston, VA. This column represents his personal views.