State and Local Governments: Give Contractors Clear Plans, or Pay Their CostsFebruary 2017
Construction contractors working on state and local government projects in Missouri now have another tool for their tool belts. On February 14, 2017, the Court of Appeals for the Eastern District of Missouri, in Penzel Construction Company, Inc. v. Jackson R-2 School District, et al., formally recognized both that a Spearin claim is an acceptable vehicle for bringing a cause of action in Missouri and that a modified total cost methodology ("modified-TCM") can be an acceptable way for calculating damages under a Spearin claim. The upshot of this ruling is that contractors that receive inadequate or deficient plans and specifications from governmental entity-owners can recover for losses attributable to the problems with the plans and specifications, even if the contractor cannot track or precisely allocate the costs and damages related to the defects.
The Underlying Facts in Penzel
The Jackson R-2 School District hired Penzel Construction to build an addition to the Jackson High School. The District supplied electrical plans that its architect had prepared to Penzel and Penzel's electrical subcontractor during bidding. Both parties relied on these plans in formulating a bid for their work, but neither noticed any errors. Significant problems with the electrical plans were discovered during construction. The District's slow response to the design errors delayed Penzel's work by sixteen months. While Penzel's electrical subcontractor created daily logs at the outset of the Project to track these issues, it eventually stopped maintaining these logs as problems persisted. The sheer volume and variety of interfering and disruptive events made it impractical to track the damages and extra hours attributable to each delay.
What Is a Spearin Claim?
The Spearin doctrine stands for the proposition that when a governmental entity includes detailed specifications in a contract, it impliedly warrants that  if the contractor follows those specifications, the resultant product will not be defective or unsafe, and  if the resultant product proves defective or unsafe, the contractor will not be liable for the consequences. U.S. v. Spearin, 248 U.S. 132, 136-38 (1918). Prior to Penzel, federal courts had already recognized that this doctrine is not merely a shield against liability; it can also be used affirmatively to compensate a contractor that suffers delays due to erroneous specifications. Through its holding in Penzel, the Missouri Court of Appeals held that Spearin can be used to assert a claim when the following elements are met: (1) there is a dispute between a contractor and a governmental entity; (2) arising from a construction contract; (3) where the governmental entity furnishes inadequate or deficient plans and specifications for work to be performed by the contractor under the parties' agreement; and (4) these deficiencies cause additional costs for the contractor.
Proving Damages under a Spearin Claim through a Modified-TCM
When a contractor incurs increased costs because of "disruption" or "impact" events beyond its control (like deficient plans), the contractor faces the difficult task of proving (in court or at arbitration) how much it incurred in extra costs because of the events. There are various "means" to link the increased costs and impact events including the "measured mile" approach, the modified-TCM, and the total cost methodology. A "measured mile" approach compares productivity during periods of a project that have been adversely impacted to the productivity levels during periods that were not impacted, or that were unhindered. The unimpacted or unhindered period of performance is referred to as the "Measured Mile," which is used as the baseline to predict what the contractor's cost performance should have been but for the impacts and hindrances.
The measured mile approach is generally accepted as the best approach, but courts have recognized the modified-TCM and total cost methodology as legitimate approaches to calculating damages in certain circumstances.
Penzel was the first time a Missouri court addressed whether a modified-TCM could be used to calculate damages. A modified-TCM approach is significantly easier and less expensive for contractors than a measured mile analysis, but is also inherently less precise. Roughly stated, under the modified-TCM, damages are measured by calculating the difference between the contractor's total costs less the bid amount, then reducing that amount by any costs that were attributable to the contractor's own errors.
Penzel held that a modified-TCM might be an acceptable measurement of damages if the contractor can submit sufficient evidence to substantiate these four factors: (i) the nature of the particular losses make it impossible or highly impractical to determine them with a reasonable degree of accuracy; (ii) the plaintiff's bid or estimate was realistic; (iii) its actual costs are reasonable; and (iv) it was not responsible for the added expenses. If the contractor cannot show all of these factors, then a court can still consider modified-TCM, but adjust the total damages downward to reach an equitable amount. In Penzel, the Court was satisfied that the modified-TCM provided an adequate basis for a jury to calculate damages with reasonable certainty.
Going forward, governmental entity-owners must take notice of Penzel by making sure that it and/or its hired architect and design professionals furnish clear and accurate plans for contractors. If they do not, the entities could very well be found liable for the Contractor's increased costs resulting from defective and inaccurate plans. In that event, as noted by the Court of Appeals in Penzel, the entities would then need to take action against their hired design professionals to recoup the costs paid to the contractor.
Please feel free to reach out to a Lewis Rice Construction attorney if you have any questions or concerns regarding this development in Missouri.