if PCO notifies the henceforth anything other than 100% inspection will be considered contract default beginning with the next delivery, does the new direction constitute a constructive change in that both parties agreed (by operation) to conduct business without 100% inspection? would the answer change if PCO were notified much earlier of the sampling inspection and made no move to correct, but upon change of PCO, government required full compliance?
These issues should always be discussed with your contracting officer and legal counsel. From the limited information provided a couple of issues come to mind. Lets first take a look at the definition of Constructive Change.
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The definition in the GLOSSARY, DEFENSE ACQUISITION ACRONYMS AND TERMS, Twelfth Edition, July 2005 is as follows:
Constructive Change: A constructive change occurs when: the contractor performs work beyond that required by the contract without a formal change order, and it is perceived that the work originated from a Government informal order or is due to Government fault. A Government informal order can be defined as words or deeds excluding advice, comments, suggestions, or opinions.
There are four general categories of constructive changes:
Disagreement over contract requirements.
Failure of the Government to cooperate during contract performance.
Defective specifications and misleading information.
Acceleration of contract performance to finish sooner than what is stated in the contract schedule.
A constructive change is sometimes called a 'change by implication' and occurs when the Government, by its actions, changes the contract without specifically adhering to the requirements of the 'Changes' clause. A constructive change order has been defined as an oral or written act or omission by the Contracting Officer or other authorized Government official, which is of such a nature that it has the same effect as a formal written change order under the Changes clause. In Government contract law, the concept of constructive changes is well established. FAR 43.104 and the Notification of Changes clause (52.243-7) both recognize this concept.
Board decisions have recognized that an informal requirement for performance of additional work, for example, is substantially equivalent to a formal requirement and must be governed by similar principles. The significance of recognizing constructive changes as a responsibility of the Government representative, and its effect on the contractor, should be recognized and understood by both parties so that they may be able to identify conduct and actions which may be interpreted as constructive change orders.
A revision to the Changes clause for construction contracts in 1968 included a provision expressly designed to address constructive changes, and was the first standard clause to do so. The present FAR provision states that written or oral orders including directions, instructions, interpretations, or determinations by the Contracting Officer, which cause a change within the general scope of the contract, will be treated as changes under the Changes clause. As a prerequisite to the consideration of a claim based on a constructive change, however, the contractor must notify the Contracting Officer that he considers such an order to be one directing a change in the work to be performed.
Some changes to the specifications are inadvertent. Erroneous interpretations of contract requirements by the Contracting Officer (or his representative) may lead to actions, which constitute constructive changes. For example, the Government's insistence that the contractor comply with the misinterpretation has the effect of changing the specification. Such an interpretation of the contract language by the Contracting Officer may be construed as a change if it calls for something more than the contract requires. Similarly, the insistence by an inspector that the contractor perform to a higher standard of quality than that provided by the contract specifications has been held to be a change. The inspector was considered to have been authorized to act as a representative of the Contracting Officer.
Such a constructive change, which increases the burden on the contractor, is compensable. In contrast, where the specification is misinterpreted by the contractor, there is no entitlement to compensation for additional costs incurred in performing any extra work required to meet the standard established by the contract. One notable exception occurs where the contractor's interpretation is reasonable under the circumstances, especially where the contractor's mistake was apparent to the Government at the time of contract formation.
Another type of change in the specifications occurs where the Government substitutes materials or procedures for those required by the terms of the contract. Such changes are generally authorized by the Changes clause, and are compensable if they cause the contractor to incur additional cost. Similarly, where the contractor proposes a deviation in either materials or procedures, approval by an authorized Government representative is a change under the Changes clause.
Defective specifications may lead to a determination of constructive change. There is an implied warranty that if the Government's specifications are followed, the item produced will meet the contract requirements. Specifications may be considered defective because of simple error, inadequate detail, practical impossibility of performance, or a combination of these. A constructive change may be found if the defect causes the contractor to incur additional cost. Since only the Contracting Officer or his authorized representative has authority to issue change orders, the Government may be able to avoid many constructive changes if these individuals are alert to the implications of their actions. The prudent contractor will confirm directions he receives from other Government representatives. The Contracting Officer, on the other hand, should see that all Government personnel having contact with the contractor recognize the limitations on their authority, and thus avoid committing the Government inappropriately. Furthermore, the Contracting Officer should recognize that the courts may hold that silence on his part constitutes acquiescence to the change if he had knowledge of the directions or interpretations given to the contractor.
First issue: Has the Government been paying for 100% inspection per the contract and receiving sampling? If so, the government may be due substantial consideration for the two years of non-compliance.
Second issue: "Both parties agreed (by operation)"?? Was the contracting officer involved? If so a contract modification should have been completed enforcing the new inspection requirements and consideration should have been received. If the contracting officer was not involved and an agreement was reached by parties other than the contracting officer then a constructive change could be possible.
Third issue: Silence is not golden, if the contracting officer had been aware of the contract inspection non-compliance and didn't take steps to correct then there may be an issue.
Bottom Line: With the limited information provided it's impossible to make a determination on this issue. We recommend you read the entire contract and discuss the issue with your contracting officer and legal counsel.