Kirkyla & Remeza, Inc. v. Dep't of Design and Construction OATH Index No. 1060/04, mem. dec. (June 11, 2004)

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1 Kirkyla & Remeza, Inc. v. Dep't of Design and Construction OATH Index No. 1060/04, mem. dec. (June 11, 2004) Contractor filed appeal with Contract Dispute Resolution Board for compensation under construction contract. Petitioner's requests for payment were denied by respondent on July 24, The Board held that the petitioner failed to establish its entitlement to compensation for omitted work. NEW YORK CITY OFFICE OF ADMINISTRATIVE TRIALS AND HEARINGS CONTRACT DISPUTE RESOLUTION BOARD In the Matter of KIRKYLA & REMEZA, INC. Petitioner - against - DEPARTMENT OF DESIGN AND CONSTRUCTION Respondent MEMORANDUM DECISION RAYMOND E. KRAMER, Administrative Law Judge/Chair ELISA VELAZQUEZ, General Counsel, Mayor's Office of Contracts MICHAEL J. HOLLAND, Prequalified Panel Member Pending before the Contract Dispute Resolution Board ("the Board") is the petition of Kirkyla & Remeza, Inc. ( petitioner ), seeking additional compensation in the amount of $707, from respondent, the Department of Design and Construction ("respondent"), for work omitted from a contract to conduct remediation of petroleum contaminated sites. Petitioner contends that it is entitled to lost profits and overhead costs incurred in contemplation of the entire contracted project prior to the omission of work to be performed. Respondent argues, inter alia, that the petitioner was entitled to compensation only for work actually performed. BACKGROUND This dispute arises out of petitioner's work under Contract No. 99H9376 (Project No. PW348-24) with respondent for the remediation of petroleum contaminated soil and ground water,

2 -2- as well as the upgrading, replacement or decommissioning of petroleum storage tanks. Petitioner was one of five contractors selected through negotiated acquisition from a pre-qualified list, and was assigned to perform the services described above at thirty-nine sites. In a letter to petitioner dated April 3, 2002, respondent stated that petitioner s contract with respondent would expire on May 19, 2002, and directed petitioner to stop any new work and to continue closeout and remediation transition activities until May 19, As of the date of the letter, petitioner had worked on or was working on thirteen of the thirty-nine sites. The remaining twenty-six sites were assigned to the other contractors. Petitioner was subsequently granted an extension to February 28, 2003 in which to complete closeout activities. In a letter dated June 27, 2003, petitioner requested a payment of $707, for omitted work pursuant to Article 31 of the contract. In a letter dated July 24, 2003, respondent notified petitioner that pursuant to Article 33 of the contract, its request for an additional payment was denied. Petitioner filed a Notice of Dispute on August 4, 2003, which was denied by respondent on August 13, In a letter dated August 29, 2003, petitioner appealed to the Office of the Comptroller. In a decision dated January 16, 2004, the Comptroller denied petitioner s claim. On January 27, 2004, petitioner filed this appeal with the Board. Respondent filed its answer on March 26, Petitioner sought to file additional exhibits on April 2, 2004 as well as a reply to respondent s response on April 7, In a letter dated April 15, 2004, respondent objected to petitioner s filing of additional exhibits and memoranda. Based on petitioner s assertion that the additional exhibits were part of the record before the Comptroller in the underlying proceeding, the Board granted petitioner permission to file the additional exhibits and reply memoranda, which were then included into the record. The Board convened to hear oral argument on April 29, 2004, at which time petitioner and respondent presented their oral arguments before the Board. The record in this appeal closed at the conclusion of oral argument. ANALYSIS Petitioner requests payment in the amount of $707, In calculating this amount, petitioner cites Articles 33, 31, 28.1, and of the contract.

3 Article 33 states: Article 31 states: Article states: -3- The Commissioner, in addition to those matters elsewhere herein expressly made subject to his determination, direction or approval, shall have the power: (a) to review and determine any and all questions in relation to this Agreement and its performance; and (b) to modify or change this Agreement so as to require: (i) the performance of Extra Work (subject, however, to the limitations specified in Article 26 hereof); or (ii) the omission of Work whenever he deems it in the interest of the City to do so; or both; and (c) to postpone, delay, suspend or terminate the whole or any part of the Work, whenever in his judgment such action is required in the interest of the City. If any Work is omitted by the Commissioner pursuant to Article 33, the price to be paid for such Work, subject to audit by the Department and post-audit by the Comptroller, shall be reduced by an amount equal to the estimated cost of such omitted Work, computed in accordance with Subsections (a) through (g) of Article 28, unless the Contractor and commissioner can agree upon another method of fixing the value of such omitted Work. Subject to post-audit by the Comptroller, the price to be paid for Extra Work for construction services ordered pursuant to Article 26, and performed by a construction subcontractor with his own forces, shall be the actual and reasonable cost of: (a) (b) (c) (d) (e) (f) Necessary materials (including transportation to the Site); plus Necessary direct labor; plus Any special type of insurance required by reason of the performance of the Extra Work; plus Payments required to be made to labor organizations under existing labor agreements; plus Sales and personal property taxes, if any required to be paid on materials incorporated in such Extra Work, plus Maintenance, operation and rental of, or reasonable rental value of contractor-owned, necessary plant and equipment other than small tools (including gas, oil, coal, electric current, etc.); plus

4 -4- (g) Necessary installation and dismantling of such plant and equipment (including transportation to and from the Site), if any... Article states:...where a change is ordered, involving both extra work and omitted or reduced subcontract work, the subcontract price shall be adjusted, subject to post audit by the Comptroller, in an amount based upon the difference between the value of such extra work and of the work omitted or reduced. The cost of such extra work and of such omitted or reduced work shall be computed in accordance with items (a) through (g) of this Article. A Multiplier of 2.08 (the Multiplier for Construction Management Personnel ) shall be applied to direct salary rates for construction management personnel and shall include all costs and expenses incurred by the CONTRACTOR in the performance of all required construction management services, including all costs and expenses related to management, all items of overhead and any anticipated profit, exclusive of the following: (i) reimbursable direct salary rates for construction management personnel performing services for the Project, as specified in Exhibit B, and (ii) allowance amounts specified in Paragraphs 42.3, 42.4 and 42.5 below... Petitioner asserts that respondent s April 3, 2002, letter directing petitioner to stop any new work constituted an omission of work for the remaining twenty-six sites pursuant to Article 31, and that petitioner is entitled to the total price for omitted work, calculated pursuant to Article , reduced by the estimated cost of omitted work listed in 28.1(a) through (g) of Article Petitioner determines the cost for total necessary direct labor for omitted work to be $655, by calculating the total amount of direct salary costs for a project manager, two resident engineers, an office engineer, and clerical staff based on a total of 3,640 estimated work hours and the hourly salary rates for the respective positions, and then applying the 2.08 Multiplier for Construction Management Personnel pursuant to Article to obtain a total price of omitted work of $1,362, The cost for total necessary direct labor ($655,200.00) is subtracted pursuant to 28.1(b) of Article 28.1 from the total price of omitted work ($1,362,816.00) to come up with a total of $707, as the amount to be paid to construction management for omitted work. Respondent states that Article 31 sets forth the amount petitioner is to be paid for work it has already performed, but does not authorize payment for work petitioner never performed. Respondent

5 -5- states that petitioner s calculation of the amount owed creates an anomalous result in which petitioner would not be reimbursed for its necessary direct labor costs for construction management services for sites that the Commissioner omitted from the contract but would receive the multiplier for the services. Respondent states that Paragraph of Article 42 includes all costs and expenses incurred by petitioner, and that the Multiplier for Construction Management Personnel is a tool for determining the amount petitioner should be reimbursed for costs other than direct labor costs. Respondent states that if petitioner s interpretation of Article 31 is correct, petitioner erroneously omitted $707, in costs from its estimated cost of the omitted work when it calculated the amount it claims it should be paid for omitted work, and that when this additional cost is added to the cost figure for necessary direct labor costs, the resulting total cost figure obtained will always be equal to the price calculation pursuant to Article 31, and the resulting payment due would in all cases be zero. Respondent states that petitioner s interpretation of Article 31 is incorrect because Article 31 was intended to apply when the commissioner has omitted a portion of work on a site, setting forth the methodology for determining the amount petitioner is to be paid for work it completed, not to pay petitioner for work it never performed. Respondent states that petitioner s interpretation of Article 31 would render a payment of zero under all circumstances and thereby not give meaning to the language in the Article. Respondent states that even if Article 31 is given the interpretation advocated by petitioner, Article 45 of the contract denies petitioner any right to compensation. Article 45 states: The commissioner shall have the right, upon ten (10) days prior written notice to the Contractor, to postpone, delay, suspend or terminate all or any portion of the services to be performed by the Contractor under the Agreement, or any additions thereto or modifications thereof, at any time and for any reason deemed to be in the City s interest. In such event, the Contractor shall be paid such part of the payment items set forth in Article 42 as shall have become due and payable hereunder for the work done by him prior thereto, or for non-cancellable orders for material and/or equipment that is not capable of use except in the performance of this Agreement and has been specifically fabricated for the sole purpose of this Agreement

6 -6- and not incorporated into the Work, subject to audit by the Department and post-audit by the Comptroller. Such postponement, delay, suspension or termination shall not give rise to any cause of action for damages or extra remuneration against the City other than that provided for herein. Respondent states that the April 3, 2002 letter terminated petitioner s services, and did not merely omit some of the sites. Respondent states that upon the termination of services, petitioner was entitled only to the payment of items set forth in Article 42 of the contract that had become due and payable for the work done prior thereto. The determinative issue is whether respondent s April 3, 2002, letter to petitioner notifying it to stop any new work and complete work already commenced on-site constituted a termination of the contract, or whether it was merely a modification of the contract to omit work for which petitioner could receive payment for expended overhead and unrealized profit under the original terms of the contract. The Board finds that respondent s April 3, 2002, letter constituted a termination pursuant to Article 33 of the contract. In the letter, respondent notified petitioner that the contract would be expired on May 19, 2002, and requested that petitioner direct its subcontractors to stop any new work, and that only ongoing fieldwork, closeout activities and remediation transition activities were to continue until May 19, Although respondent s letter did not use the specific term termination, respondent s intent is clear in that it requested that petitioner complete all on-site work commenced and not to start work on any more sites even though work had commenced on only one-third of the sites in the contract. Another indication that respondent intended to terminate the contract rather than omit work is that the remaining two-thirds of the sites in the contract were assigned to other contractors, indicating not that respondent intended to have no work done on the sites, but instead intended that petitioner not work on any more sites. Furthermore, the timing of the request, shortly before the expiration date of the contract, indicates an intent to have the contract terminate upon the expiration date and petitioner s completion of work commenced on-site. Respondent confirmed this intent in a letter dated July 24, 2003, when it denied petitioner s June 27, 2003, request for payment for omitted work. Petitioner argued that even if the April 3, 2002, letter terminated the contract, it would be entitled to compensation for lost profits and overhead for the omitted work. Petitioner states that the

7 -7- overhead and profit can be calculated by multiplying the salary rates for staff by the estimated number of hours worked, 3,640, and multiplying the result by the 2.08 Multiplier for Construction Management Personnel set forth in Article of the contract. However, pursuant to Article 45 of the contract, upon termination of the contract the Contractor shall be paid such part of the payment items set forth in Article 42 as shall have become due and payable hereunder for the work done by him prior thereto, or for non-cancellable orders for material and/or equipment that is not capable of use except in the performance of this Agreement... [emphasis added]. In the instant case petitioner seeks compensation in the form of unrealized profits and overhead expended. Under the plain and clear terms of Article 45, following termination of the contract petitioner is entitled to payment solely for work done and costs actually incurred for the terminated portion of the contract, and not for unrealized profits. Article 31 of the contract, citing Article 28.1, indicates that compensation for omitted work includes both overhead and profit. Therefore, Article 31 is inapplicable in the instance of a terminated contract. In rendering its decision, the Board will adopt the plain and clear terms of the contract. See Action Electrical Contracting Co., Inc. v. Dep t of Environmental Protection, OATH Index No. 1630/02, mem. dec. (Dec. 13, 2002); Sterling Sanitary Supply Corp. v. Dep t of Citywide Admin. Services, OATH Index No. 1677/03, mem. dec. (Dec. 19, 2003). Even assuming, arguendo, that ambiguity exists regarding whether petitioner may recover lost profit in a terminated contract, Article 56 of the contract requires petitioner to request a clarification of same by writing to the Commissioner whose decision shall be binding on the parties. Even should petitioner be entitled to costs incurred as overhead, it improperly relies on Article and the 2.08 Construction Management Personnel Multiplier in determining its entitled compensation. Article states that the Multiplier includes all costs and expenses already incurred by the contractor, and states that the Multiplier shall include, among other items listed, compensation to officers and employees of the contractor, expenses incurred in the performance of required services, expenses incurred with respect to home office general facilities, all management, administrative or overhead expenses of any kind, and profit. The cost calculated pursuant to Article is then reduced pursuant to Article 28.1, subsections (a) through (g), the

8 -8- remainder being a value including both overhead and profit. As it has already been established that the terminated contract precludes compensation on the basis of lost profit, the calculation of costs pursuant to Article and reduction thereof pursuant to Article 28.1 (a) through (g) is an improper method of determining the amount owed to petitioner as costs incurred. Instead, petitioner could be entitled to compensation pursuant to Article 45 of the contract. However, the issue of petitioner s entitlement, if any, pursuant to Article 45 has not been presented to the Board, and will therefore not be considered. CONCLUSION The Board finds that petitioner has not established its entitlement to payment for work items not performed in its terminated contract with respondent. The foregoing is the final decision of the Board. All members of the Board concur in this decision. June 11, 2004 APPEARANCES: EVALDAS REMEZA, P.E. Representative for Petitioner MICHAEL A. CARDOZO, ESQ. Corporation Counsel, Attorney for Respondent BY: PAUL A. GOETZ, ESQ. Raymond E. Kramer Administrative Law Judge/Chair