By Mike King, Esq.

Answer: The only authorized government employees can bind the government to contracts, including change orders on construction projects.

Governments are not bound by unauthorized acts of employees. "Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority." Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 384 (1947). So just because the staff engineer, architect or construction manager promises to approve a change order for extra compensation for extra work, doesn't mean the Government will pay for it.

Kaman Aerospace Corporation learned this lesson the hard way when it sought additional compensation for work beyond the "statement of work" contained in its "Firm Fixed Price" contract with the Arizona Board of Regents. Kaman Aerospace Corporation v. The Arizona Board of Regents, 217 Ariz. 148, 171 P.3d 599 (Ct. App., 2007).

Kaman and the Board of Regents had a written contract for a "Firm Fixed Price" of $9,083,269.00 for components and work that Kaman was to provide for a $32,000,000 collimator used for testing the accuracy of space telescopes before they are launched. Eventually Kaman submitted a claim to the Board of Regents for change orders totaling $6,250,110.00. Essentially, Kaman said that University engineers changed the design guidelines and said that when these technical changes were made, the University began "a process that should have resulted in a contracts person ultimately agreeing on a contract modification." After a complicated trial, the jury decided that the Board of Regents breached its contract with Kaman, but awarded Kaman $0. Both sides appealed.

Basically, the Board of Regents argued that the contract could only be modified in writing and any oral modification of the contract was not permitted. Moreover, the Board of Regents said that University employees lacked the authority to enter into any contracts or changes to contracts on behalf of the Board of Regents. The Board of Regents asserted that "only a designated contracting officer of the State can bind the University." According to the Board of Regents, even if changes to the design guidelines were a written agreement, the Board of Regents did not need to pay for the changes because the changes to the design guidelines came from University engineers who lacked authority to bind the State to any contract.

The Board of Regents' policy says that only University officers designated by the President of the University are authorized to sign contracts on behalf of the State. The observatory engineers who directed that changes be made in the design guidelines for the collimator were not on the President's designated list and, therefore, lacked such authority.

So the Court of Appeals threw out the judgment in favor of Kaman for $0 on the breach of contract claim. It also agreed that Kaman had not breached its contract with the Board of Regents, however. Neither side received an award of attorneys' fees. Thus, after spending a lot of money on expensive lawyers from big law firms, neither party received any compensation.

So what should you do if the owner on a government construction project changes the scope of the work and makes it more expensive? Not surprisingly, all change orders on government projects, whether oral or written, require approval of an authorized government agent. You may be able to receive compensation for oral change orders and changes based upon the conduct of the parties in the course of construction, but only if those oral change orders or changes based upon conduct were approved by authorized government employees.

On a government project, as on a private construction project, you proceed with additional work without an authorized and signed change order at your peril. Your company should resist work beyond the scope of the original contract and insist upon a properly authorized and executed change order. Know who is authorized to approve contract changes and insist that no changed or additional work will be performed unless an appropriately authorized employee approves it. Of course, we would always recommend that such authorization be in writing. Communicating concerns, insisting upon prompt responses to requests for information to the design team, and only performing work beyond the scope of the initial contract with directions from a properly authorized agent of the owner will be essential to preserving claims on either oral or written change orders against governmental entities.

If you have questions or concerns about change orders or other issues involving compensation on construction projects, please do not hesitate to call me.

Michael R. King is a partner with the law firm of Gammage and Burnham which is a sponsor of the Phoenix CEO-CFO Group.