Economic Waste: When the Federal Government Is Not Entitled to
Strict Compliance
by Franci E. Gardner, Associate*
In federal government contracting, the principle of “strict compliance with contract
specifications” means exactly that; even when the contract specifications are more
stringent than industry standards. Consequently, if a federal government contractor does
not comply with the government’s specifications and those specifications are express and
not ambiguous nor defective, then the government typically has the contractual right to
demand strict compliance without additional compensation to the contractor.
“Typically,” however, does not means “always”; and the government’s right to insist on
strict compliance with its contract specifications is not absolute. Indeed, if the
government fails to consider whether the non-conforming work is suitable for its intended
purpose but instead insists on strict compliance, the costs of repair or replacement may be
chargeable to the government under the doctrine of economic waste.
What Is The Doctrine of Economic Waste
Defining economic waste can be tricky. Generally speaking it is the unwise use of
resources. The doctrine most often comes into play when the market value of a project or
property or its usefulness will not increase comparably to the cost of completing or
correcting performance. The doctrine has been applied in private construction contract
disputes as long ago as 1921 when Justice Cardozo, then of the Court of Appeals of New
York reasoned in Jacobs & Young v. Kent that minor deviations from the contract
language cannot always be treated as a “breach . . . to be followed by forfeiture.” See,
239 N.Y. 239, 129 N.E. 2d 889 (1921). In federal construction contracts, a similar
recognition that non-conforming work shall not always result in forfeiture exists in the
standard inspection of construction clause, (FAR 56.246-12); though not in terms of
economic waste. Under its standard inspection clause, the federal government has two
options in the event of non-conforming construction work before default terminating its
contractor; 1) the contracting officer may direct its contractor to repair or replace the nonconforming work, or 2) the contracting officer may accept the non-conforming work with
an appropriate adjustment in the contract price when acceptance is in the public interest.
Suppose, however, a contracting officer directs its contractor to repair or replace nonconforming work even though the work, as is, is suitable for the intended purposes and
the repair or replacement can only be done at great cost. It was not until 1992 that the
courts would apply the economic waste doctrine to a federal construction contract. See,
Granite Construction Co. v. United States, 962 F.2d 998 (Fed. Cir. 1992)
Granite Construction and Economic Waste
In Granite Construction, the Corps of Engineers had contracted for the construction of a
lock and dam. Waterstop was to be placed in the vertical joints between the walls to
prevent leakage. After Granite had installed a portion of the waterstop, the Corps of
Engineers declared the waterstop to be non-conforming and ordered removal and
replacement with other waterstop. Under protest, Granite performed the replacement and
filed a claim for cost of the repair work, which the contracting officer and thereafter the
board of contract appeals denied. In the proceedings, Granite’s expert witness had
testified that although the originally installed waterstop did not strictly comply with the
contract specifications, it was adequate for the project’s ultimate requirements. On
appeal to the Federal Circuit Court of Appeals, the court held that while the government
usually has the right to require strict compliance with specifications, the public interest
provision of the standard inspection clause includes an obligation to consider the nonconforming work relative to the performance requirements, i.e., would it be economically
wasteful to repair or replace the non-conforming work. Because the Corps made no such
determination, its rejection of the waterstop was “arbitrary and capricious” and Granite
was able to recover virtually all its costs for the replacement waterstop.
Recent Developments of the Economic Waste Doctrine in Government Contracts
The Granite ruling was not an aberration. Since the ruling, the boards of contract appeals
have made similar applications of the economic waste doctrine. For instance, in Appeal
of George Ledford, ENGBCA No. 6268, 98-2 BCA ¶ 30,016, contractor Ledford entered
into a contract with the Corps of Engineers to renovate and pave entrances of four Corps
parks at separate locations surrounding Table Rock Lake along the Missouri-Arkansas
state line. The contract required Ledford to construct a concrete slab, but this slab had
many deficiencies such as being “wavy” and bulging outward. The Corps invoked the
contract’s Inspection Clause and ordered Ledford to remove and replace the concrete slab
with one that conformed to the contract specifications. Ledford admitted that the
deficiencies existed, but characterized them as minor problems which could be repaired.
The board of contract appeals found that the Corps was entitled to strict compliance with
the contract’s requirements, but the board also recognized the option for the Corps to
accept non-conforming work at a downward adjustment of the contract price if within the
public interest. The doctrine of economic waste required the Corps to exercise
reasonable discretion in ordering the removal and replacement of the concrete slab.
Instead, however, as the board found, the Corps did not reasonably consider Ledford’s
proposal to repair the slab’s defects or evaluate the work in light of a downward
adjustment in the contract price. The Corps’ insistence on strict compliance with the
contract’s requirements was arbitrary, and the Contracting Officer was forced to negotiate
an equitable adjustment based on the reasonable cost of the remedial work, reduced by
the reasonable cost Ledford would have incurred had it been permitted to repair the
deficiencies.
Although the economic waste doctrine is now an established doctrine in government
contracts, the claimant contractor bears the burden of proving that it is entitled to
recovery under the doctrine. For example, in order to recover for non-conforming work,
the contractor must establish the critical elements that its work though not in strict
compliance with the contract is otherwise adequate for its intended purpose, and that the
cost of correction is economically wasteful relative to the benefits gained from the
correction. In Twigg Corp., GSBCA No. 14,327, 98-2 BCA 29,803, a contractor was
under contract with the General Services Administration to install a fire alarm system. A
subcontractor used a different wire for the fire alarm circuits than that specified by the
contract, and the GSA directed the contractor to replace the wire despite the fact that the
wire had been previously approved. The board noted that there had not been enough
facts presented to it to make a determination either way. The board did state, however,
that the critical element was whether the originally-installed wire was “adequate for its
intended purposes,” and it would consider information regarding the reasonable value of
the work as-built along with information regarding the acceptability of the originally
installed wire.
In at least one case, aesthetic shortcomings outweighed application of the economic
waste doctrine so as to preclude the contractor’s recovery for repair and replacement. In
Appeal of Worcester Brothers Co., Inc., ASBCA No. 49,014, 99-2 BCA ¶ 30,519, the
contractor Worcester contracted to perform roofing work at the United States Naval
Academy. Under the contract, the roofing tiles were to be “natural red clay in color.”
The government found that Worcester had installed tiles that were orange and not a
reasonable match to the existing color. The government directed Worcester to replace the
riles with those that fit the contract specifications. The board of contract appeals found
the government was reasonable in rejecting the non-matching tiles, and noted that the tile
specified in the contract needed to match the appearance of the existing tile because the
buildings were historical.
Conclusion
Thanks to Granite, a construction contractor to the federal government can fall back on
the economic waste doctrine to seek recovery of costs for economically wasteful remedial
work ordered unreasonably. However, it is the contractor who must shoulder the burden
of proving why the economic waste doctrine should apply.
* Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
8405 Greensboro Drive, Suite 100
McLean Virginia 22102
703-749-1000