Schedule Rules

I was reading the March/April Issue of Construction Law Briefing and came across an interesting article about scheduling.  It seems pretty obvious that sticking to a schedule is very important, but this article really brings it home.  Let me give you a quick summary:

One of the most important aspects of a construction contract is the schedule. Even a recovery schedule may not be enough to save a contractor from an early default termination of the contract. This is demonstrated in the following case involving big names such as McDonnell Douglas, General Dynamics and the U.S. Navy.

McDonnell Douglas and General Dynamics were contracted by the Navy in 1988 to design, develop and produce a new stealth fighter. The first flight of the first prototype was originally scheduled for June 1990. Additional deployments of more advanced prototypes were to take place each month through 1991.

The Navy realized the design process was taking longer than anticipated, so it attempted to negotiate a new schedule. However, the contractors, already expecting a $2 billion loss, insisted on presidential relief from the contract’s price terms.

A recovery schedule was issued by the Navy in August 1990 without the contractors’ agreement. The first flight was moved back to December 1991, and the remaining aircraft were to be released every other month through February 1993.

Manufacturing the fuselage parts proved more difficult than expected. The contractors had to cut costs and did so by eliminating overtime and cutting 110 employees.

The Department of Defense stepped in to review the project’s status. On January 7, 1991, the Navy terminated the contract, claiming that the contractors could not complete the project within the allotted time.

McDonnell Douglas and General Dynamics sued the Navy, claiming a termination of convenience rather than a default termination. The Court of Claims initially agreed with the contractors and they were awarded $1.2 billion for the termination costs.

This was not the end of the case, however. The Court of Claims, after a series of appeals and new trials, reversed their decision and determined that it was indeed a default termination. The court determined that the contractors’ demands for presidential relief were unreasonable and that they should have been more willing to renegotiate the schedule. The court also determined that the Navy’s unilateral recovery schedule was not unreasonable and that it was enforceable.

The Court of Claims reviewed a series of internal documents in which the contractors stated that they would not be able to meet the scheduled deadlines. The court observed:

The law does not require the Government to help “fix the contract.” The Government can point to reasons in retrospect why [the contractors] were not making the progress that some officials hoped and perhaps expected. So long as those reasons form a rational basis for a reviewing court to uphold [the] decision to terminate, the court must do so.

The initial $1.2 billion award to the contractors was then taken away.

 

As this case demonstrates, it is of high importance that a schedule be followed. If a recovery schedule becomes necessary, a contractor should review it carefully with legal counsel. If the schedule is reasonable, the contractor should be prepared to stick to it to avoid early default termination of the contract.