Fraud Justified Revocation of Acceptance of Construction Work

The government was entitled to revoke its acceptance of a design/build contract for military housing, the Armed Services Board of Contract Appeals ruled, because the contractor's concealment of compaction test reports and egregious workmanship defects amounted to gross mistakes constituting fraud. Shortly after the work was completed, slabs heaved and structures on foundation backfill settled, causing widespread damage to the housing units. These problems were never resolved and the contracting officer eventually revoked the government's acceptance and terminated the contract for default. On appeal, the contractor admitted its workmanship was defective, but argued the deficiencies were caused by the government's specification of slab-on-grade construction in an area underlain by fat clay, or the revocation was improper because the government had actual knowledge of the noncompliant construction methods. The government responded the contractor's design choices and "shoddy" construction practices caused the damage.
Egregious Workmanship Defects
Under the contract's Inspection of Construction clause (FAR 52.246-12), acceptance was final and conclusive except for latent defects, fraud, gross mistakes amounting to fraud, or the government's rights under any warranty or guarantee. For gross mistakes to amount to fraud, there must be "a major or great or serious mistake" that occasioned the acceptance of the work. There must be a false representation or misrepresentation of a material fact, but it can "be by words or conduct or by false or misleading allegations or by the concealment of, i.e., failure to disclose, facts that should have been disclosed in the circumstances." Here, the contractor did not follow specifications when it used unsuitable material as fill, which caused heave, and when it used lifts exceeding eight inches, which caused undercompaction. It did not comply with a 92-percent compaction standard, which caused significant settlement and negative drainage toward most of the units. Also, a subcontractor did not follow a specification requiring excavations to be dewatered and prohibiting standing water in the excavations, and the contractor used unsuitable fill under overexcavated footings, and backfill with liquid that exceeded the limits in the earthwork specification.
Test Results Concealed

Further, the contractor performed only a fraction of the backfill compaction tests required by the quality control plan, and there were a significant number of failing tests. The contractor then concealed the reports by disregarding a specification requiring it to "promptly" submit copies of each day's inspections and tests to the CO, and it affirmatively directed its independent testing laboratory to stop sending reports and letters to the government. Without the compaction test reports, the government could not evaluate the contractor's compliance with the compaction requirements or make a reasoned decision regarding the acceptability of the work. Finally, at the time of acceptance, the government relied on the contractor's representation that the units were complete and ready for occupancy. Given the facts and circumstances, ten and a half months constituted a reasonable amount of time for the government to revoke its acceptance. However, the government's default termination of a second, similar contract was set aside. The government waited 22 months before revoking its acceptance, which constituted an unreasonable amount of time. As a result, the government's acceptance of the second contract was final. (American Renovation and Construction Co., ASBCA, ś92,633)

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