Dealing with Ambiguities in Design-Build Contracts

Record Steel v United States

This principle is well demonstrated by a recent case before the U.S. Court of Federal Claims, Record Steel and Construction v United States, 62 Fed Cl 508 (October 19, 2004). The dispute in this case involved whether a design-build contract required foundations to be over-excavated. The design-builder argued that the contract unambiguously made over-excavation a design recommendation—not a design requirement. In the alternative, it argued that if the contract was ambiguous, then the ambiguity was latent and should be construed against the government.

The government argued that the contract expressly and unambiguously required the design-builder to over-excavate the foundation. After carefully examining the relevant contract provisions, the Court of Federal Claims found the contract to be latently ambiguous and saddled the government with the financial responsibility of the over-excavation.

The Corps of Engineers (Corps) awarded Record Steel and Construction, Inc. (Record Steel), an $8.8 million design-build contract for a dormitory at Offutt Air Force Base in Bellevue, Nebraska. Part of the request for proposal (RFP) contained a foundation analysis report, with a section entitled "Subsurface Recommendations." Included in the recommendations was the following.

The recommended program contained statements that materials be undercut and "should be excavated" from below the bottom elevation of all building footings.

In response to the RFP, Record Steel submitted a price proposal informing the Corps that it did not believe over-excavation for the foundations would be required but, if it was ultimately determined that over-excavation was needed, Record Steel committed to performing this work at no additional cost. The need for over-excavation was discussed during several design meetings both prior to and after contract award. The parties agreed that Record Steel's geotechnical firm was to conduct field investigations and tests and provide such information to both Record Steel and the Corps. If the resulting data was satisfactory, then Record Steel would proceed with its design without conducting over-excavation.

The geotechnical firm ultimately concluded that the native soils were adequate to support the building's footings without over-excavation. However, the Corps apparently reevaluated its position and refused to issue a notice to proceed for the footings unless Record Steel agreed to conform to "the requirements of the subsurface recommendations of the Foundation Analysis Report." Record Steel complied with the over-excavation order and submitted a claim for approximately $188,000 for the costs associated with this effort.

The court first looked at the reasonableness of each party's contract interpretations. In finding that Record Steel's interpretation was reasonable, it first noted that Record Steel, as the designer-of-record, was expected to exercise its professional judgment in designing the dormitory and had to defer only to specific requirements contained in the RFP—not recommendations. The court then examined how the "requirements" in the RFP were expressed in terms of words like "shall," "may," and "should." It found that the most critical aspects of the foundation report used the word "should" instead of "shall"—and that this expressed a desire for action, but not a binding requirement.

The court also looked to the fact that the foundation report stated that the Corps "believed" that over-excavation was "more viable" to improve the site, and couched its report in terms of a "recommendation" rather than as a requirement. The court also found Record Steel's interpretation to be reasonable based on the fact that the Corps' initial borings were not conducted within the actual footprint of the dormitory's location.

The court also concluded, however, that the Corps' contract interpretation fell "within the zone of reasonableness." It looked to the fact that the RFP used the verb "shall" in connection with incorporating the foundation report's recommendations into the contract, and that, by referring to the terms "over-excavation and compaction requirements," there was an argument that the RFP expressly converted the foundation report's recommendations into requirements.

The Court Looks to Contra Proferentem

Faced with two reasonable contract interpretations, the court then looked to the rule of contra proferentem for guidance in who should bear the risk of these ambiguities. The four-part test associated with this rule places the risk of the ambiguities on the government when:

1. The contract specifications were drawn by the government;
2. The language used therein was susceptible to more than one interpretation;
3. The intention of the parties does not otherwise appear; and
4. The contractor actually and reasonably construed the specifications in accordance with one of the meanings of which the language was susceptible.

The court found that all of these conditions were satisfied. It also refused to apply the exception to the general rule of contra proferentem (i.e., the patent ambiguity doctrine), which resolves ambiguities against the contractor where the ambiguities are "so 'patent and glaring' that it is unreasonable for a contractor not to discover and inquire about them." This ambiguity was not deemed obvious, particularly since the Corps had not indicated its view of the mandatory nature of these so-called requirements until many predesign meetings between the parties had taken place.

Lessons Learned

There are several "take-aways" from the Record Steel case. Owners who use competitive procurement processes—like the Corps of Engineers and other public agencies—have to remember that proposers get the benefit of the doubt if there is something wrong with or unclear about an RFP document furnished by the owner. The fact that the over-excavation concept was expressed in terms of a "recommended" process started the potential for ambiguity, and the "should," "may," and "shall" verbs contained in the foundation report sealed the deal for the conclusion that there was an ambiguity. If the Corps wanted to mandate over-excavation, it should have said so explicitly.

Equally important, however, is that Record Steel did the right thing by advising the Corps during the proposal phase that it did not intend to undercut unless soil conditions required it to do so. These actions demonstrated that Record Steel actually relied on its interpretation of the ambiguity, which is one of the predicates to recovery under the contra proferentem rule. The result of this case might have been different if Record Steel saw the ambiguity but never informed the Corps of its interpretation during the proposal process.