Incorporating Excusable Delays Into Firm Fixed-Price Subcontracts May Create Liability

May 14, 2024

In L3Harris Maritime Services, Inc f/k/a L-3 Unidyne, Inc. v. BAE Systems, Norfolk Ship Repair Inc., U.S. Magistrate Judge Robert Krask from the Norfolk Division of the Eastern District of Virginia recently held that, even in a firm fixed-price contract, requiring a subcontractor to maintain its contractually agreed-upon deadlines, even implicitly, may create liability for a constructive acceleration if the subcontractor’s reason for delay is excusable under 48 C.F.R. § 52.249-14.

BAE entered into a 2017 prime contract with the U.S. Navy and then a firm fixed-price subcontract with L3Harris. L3Harris’ period of performance was extended several times under the terms of the subcontract, but in March 2020, it suffered serious unforeseen delays due to the COVID-19 pandemic. The subcontract incorporated 48 C.F.R. § 52.249-14 into its terms and therefore explicitly made delays due to epidemics and quarantine restrictions excusable. 48 C.F.R. § 52.249-14(5) – (6). Despite that language, BAE did not slow work, stop work or allow for any divergence from previously agreed-upon deadlines. As a result, L3Harris pressed on and the price of testing and masking for staff to work in the pandemic and meet the original deadlines exponentially increased its cost. L3Harris also claimed BAE failed to take necessary steps to support its timely performance.

L3Harris filed suit alleging breaches of contract for failure to pay for constructive changes under the change clause in its subcontract. L3Harris argued that, by requiring it to meet the original project deadlines through the pandemic, BAE was responsible for a constructive acceleration of the contract. L3Harris additionally asserted that BAE engaged in several affirmative acts that delayed performance and therefore constituted compensable constructive changes.

BAE moved to dismiss L3Harris’s claims for pandemic-related delays, arguing that in a firm fixed-price contract, the subcontractor assumes the risk of unforeseen circumstances. BAE also moved to dismiss claims relating to the affirmative acts that L3Harris claimed delayed performance.

Judge Krask granted BAE’s motion to dismiss pertaining to affirmative acts that delayed performance, explaining that, even though the acts may have delayed L3Harris’s performance, they did not constitute changes under the subcontract.

For the pandemic-related expenses, however, Krask denied BAE’s motion to dismiss and held that because an epidemic is an excusable delay in 48 C.F.R. § 52.249-14, expecting L3Harris to perform on schedule with the original deadline constituted a constructive acceleration. Krask went on to explain that precedent has deemed constructive accelerations to be a type of constructive change, and therefore, L3Harris met its burden in pleading a breach under the change clause for the COVID-19 delays.

In addition to the excusable delays section, L3Harris’ subcontract incorporated 48 C.F.R. § 52.243-1, which stated that “[i]f any such change causes an increase or decrease in the cost of, or the time required for, performance of any part of the work under this contract, [BAE] shall make an equitable adjustment in the contract price, the delivery schedule, or both, and shall modify the contract.”

Because of its incorporation of prime contract terms, BAE created an unforeseen and unnecessary source of liability despite having a firm fixed-price contract.