The cumulative impact claim: where do we stand in 2010?

• Author: Backus, Leland Eugene
• Position: Construction contracts

CONSTRUCTION contracts generally contain a "Changes" clause. (1) This clause allows the owner the right to change the contract within the limits of the contemplated purpose under the agreement. In larger complex construction projects like stadiums, arenas, malls and hotel gambling complexes, there may be multiple changes on the project. When these multiple changes act in sequence or concurrently, there can be a synergistic effect upon the base work. This synergistic effect may be difficult to comprehend or anticipate. "Cumulative impact" is the disruption occurring between two or more change orders and basic work, but does not include local disruption directly attributable to a specific change order. (2) The key notions with the cumulative impact claim are (I) the unforeseeability of the impact on productivity caused by a large number of changes and (2) whether the change order language constitutes a waiver or reservation of this claim. (3)

A cumulative impact claim does not necessarily equate to a cardinal change to the contract. A "cardinal change", "one that fundamentally alters the contractual undertaking of the contractor, [and] is not comprehended under the normal changes clause," (4) occurs when an owner's individual change alters the contractor's terms of performance to such an extent that the scope of performance is beyond the original contemplated scope of work of the parties. (5) In contradistinction, the cumulative impact claim is the aftermath of the inability of the contractor to accurately account for all impact costs resulting from the multiplicity of change orders, including costs not associated with any particular change. The multiple changes that produce the unforeseeable synergistic effect leading to a cumulative impact claim may or may not be changes that alter the fundamental nature of the contract.

In analyzing cumulative impact claims and cardinal change breaches, we examine similar issues, particularly the understanding or contemplation of the parties. When the contractor signed the multiple separate change orders, did the contractor contemplate all of the impacts that these changes would cause? It is understandable why some courts confuse the cardinal change notion with the cumulative impact claim presentation. In L.K. Comstock & Company v. Becon Construction Company, (6) the United States District Court in extending a doctrine of federal government contract law to apply as state law in Kentucky noted that "under the contract doctrine of 'cardinal' change that where a party to a contract alters the terms of the other party's performance to such an extent that the alterations could not have been within the realm of the parties' contemplation as evidenced by the parties' written agreement, the other party may elect not to perform and hold the other party liable for breach." (7)

The difference between the cumulative impact claim and the cardinal change breach is the injury/breach being examined. The focal point of inquiry in analyzing the cardinal change is whether the change was or was not a logical extension of the base contract, i.e., whether the change was beyond what the parties had agreed was the scope of work. The focal point of the cumulative impact claim is not whether the changes fundamentally altered the contractor's contractual undertaking, but whether the sheer magnitude of the number of changes presented an unforeseeable impact upon the base work. (8)

In order to establish a cumulative impact claim, the contractor must demonstrate that the change order procedure contemplated by the contract did not adequately take into consideration the cumulative impacts caused by the multiple change orders. The contractor must also establish that the impacts caused by the multiple changes were unforeseeable. (9) The focal point on most cumulative impact claims will be whether the express language of the change order constitutes a waiver or reservation. (10)

1. Current and Historic Developments in Case Law

   The "cumulative impact" claim was discussed over eighteen years ago in Pittman Construction Company, Inc. (11) In Pittman, Pittman Construction Company, a federal government prime contractor, sought equitable adjustments on behalf of electrical and plumbing subcontractors for delays and disruptions allegedly suffered in the construction of the Federal Office Building, Courthouse and Parking Facility in New Orleans, Louisiana. Pittman contended that as a result of 206 contract changes, its subcontractors sustained uncompensated impact costs. (12)

   The General Services Administration Board of Contract Appeals ("GSBCA") decision preceding Pittman (13) provides a good framework to analyze what boards and courts perceive to be a "cumulative impact" claim. The GSBCA considered Pittman's claims in context of a "direct impact" claim and a "cumulative impact" claim. (14) As to the "direct impact" claim, the board noted that, of the 206 changes on the job, 152 represented added work. Of these, only 11 of these exceeded $50,000. Only two were entirely related to electrical work and none were singularly related to mechanical work. Five resulted in time extensions for a total of 102 days. (15) Pittman argued that the changes were excessive and caused delay and disruption, making the job more costly. The GSBCA described "direct impact" costs as the "change-related cost increases to unchanged work." (16)

   The contractor tried to reserve the fight to assert impact claims caused by a change at the time of the change, differentiating between costs for immediate payment, which it referred to as "the usual cost elements such as labor, material and normal markups," and more remote expenses including "changes in the sequence of work, delays, disruptions, rescheduling, extended overhead, overtime acceleration and/or impact costs." (17) The contract officer insisted that these additional remote items be priced at the onset of the change and not reserved. The board agreed and granted the government summary judgment, finding that the contract officer was willing to negotiate direct impact costs and that some change-order pricing allowed for extra labor resulting from out-of-sequence work. More importantly, the board concluded that Pittman' s withdrawal of its reservation of rights letter constituted acquiescence by Pittman to the contracting officer's position that all direct impact costs would be priced at the beginning. (18) In leading to the "cumulative impact" claim discussion, the board noted that the contractor had sent four subsequent letters claiming a "disability in its attempted pricing of delay costs" which the board considered sufficient only to preserve a claim for indirect impact costs. The board concluded that these letters did not constitute a reservation of rights to negotiate at a later time under the Changes clause, but only could be utilized in a judicial pronouncement through board action. (19)

   In attempting to define these "indirect impact" or "cumulative impact" costs, the board explained:

   "[C]osts ... [which] addressed the inefficiencies and disruptions associated with changes which, when viewed cumulatively (i.e., retrospectively), were so large in number and/or magnitude as to give rise to a separately compensable impact claim. The term 'ripple effect' has also been used to describe such impact costs." (20)

   In denying the contractor's "cumulative impact" claim, the board differentiated its facts from Ingalls Shipbuilding Division, Litton Systems, Inc., (21) noting that although the present case had 206 changes, the number and dollar value of the changes were insufficient to support a cumulative impact claim. The board noted that in Ingalls Shipbuilding, there had been three contracts affected by several thousand change orders resulting in a 58% increase in contract price and a four-year delay. In the present case the contract price increased by only 12% and the term extended only 102 days on a 1000-day original performance schedule. (22) Based on this comparison alone, the board noted that "no fundamental change in the character of the work had taken place and thus no costs had been experienced whose likelihood had not been foreseeable." (23) The United States Claims Court sustained the board's decision without amending on the board's construction of and standards for a cumulative impact claim, finding that Pittman had itself deviated from the planned construction sequence and consequently where both parties contributed to the delay, neither could recover unless there was proof of clear apportionment.

   Scholars cite Pittman frequently to establish a framework for defining "cumulative impact" claims. (24) In Pittman, the GSBCA noted the diverging approaches taken in earlier decisions, concluding that a claim need not rise to the level of a cardinal change:

   * Cumulative impact must rise to the level of a cardinal change or one that fundamentally changes the contemplated scope of work.

   * Cumulative impact greater than the sum of the changes underlying it may occur without constituting a cardinal change. (25)

   Over the past two decades, boards and courts have not assisted the industry by clearly defining "cumulative impact" beyond the holding in Pittman, and parties, boards and courts continue to struggle with the necessity of proving a "cardinal change" as predicate to recovery. To derive the essence of this type of claim, it is instructive to review different definitions of cumulative impact. Some of the more notable case definitions are:

   1. Cumulative impact costs are "costs associated with impact on distant work, and are not as readily foreseeable or, if foreseeable, as readily computable as direct impact costs. The source of such costs is the sheer number and scope of the changes to the contract." (26)

   2. The source of cumulative impact loss is not simply "a series of mere isolated hardships, but rather the Gestalt principle of many problems occurring concurrently--with...