Damages for Idle Equipment are Recoverable Under Recent Kentucky Court Decision
by Stites & Harbison, PLLC
Reported Kentucky appellate court decisions in construction law are infrequent. So published decisions are noteworthy, especially when they arise from public contracts.
This article reports on the Kentucky Court of Appeals’ decision in Ford Contracting, Inc. v. Kentucky Transportation Cabinet, 449 S.W.3d 397 (Ky. Ct. App. 2014). The dispute arose from a bridge replacement project. As awarded, the contract provided that the road crossing the existing bridge would be closed and traffic detoured during reconstruction. However, after the Cabinet issued the notice to proceed, and on the very day the contractor mobilized to the site, the Cabinet instructed the contractor to stop work indefinitely and submit a price to build a temporary diversion around the work site. The Cabinet did so to appease disgruntled citizens unhappy with the road closure and detour. As requested, the contractor submitted a price but after several weeks of indefinite delay – during which the contractor’s equipment and crew were idle – the Cabinet decided to terminate the contract for convenience. The contractor’s submission for contract close-out costs included a claim for idle equipment. The Cabinet denied the claim and litigation ensued through an administrative hearing process. The hearing officer and the Secretary of the Cabinet also denied the idle equipment claim. Their denial was affirmed by the Franklin Circuit Court.
Noting that recovery of idle equipment costs was a case of first impression in Kentucky, the Court of Appeals surveyed decisions from other states and in the federal contracting arena. In concurring with those jurisdictions, the Court reversed the Circuit Court and held that idle equipment costs are compensable. “(I)dle equipment (or equipment which must remain on the job site because the project is delayed) is a real and quantifiable loss to the contractor, whether rent is paid to another or charged to the contractor himself as an accounting expense, and it is recoverable.” Ford Contracting, Inc., 449 S.W.3d 410, citing R. L. Coolsaet Const. Co. v. Local 150, International Union of Operating Engineers, 177 F.3d 648, 660 (7th Cir. 1999). Moreover, the Court held that an award for the contractor for lost profits did not adequately compensate for idle equipment.
This decision bodes well for contractors but key facts underlying the decision must be noted. First, the contractor did not cause the delay. Second, the Cabinet imposed an indefinite hold without invoking the suspension of work specification that would have triggered force account cost principles.
Third, and most important, the Cabinet’s termination for convenience was adjudged to be a breach of contract. In Kentucky, termination of a public project for the owner’s convenience is permitted only if there has been a substantial change of circumstances. RAM Engineering & Construction, Inc. v. University of Louisville, 127 S.W.2d 579 (Ky. 2003). In this case, the Cabinet knew about public opposition to the road closure before awarding the contract and issuing the notice to proceed. Since there was no substantial change in circumstances, the termination was unlawful.
Also noteworthy for future claims are the guidelines the Court articulated for meaning idle equipment costs:
- The contractor is only entitled to compensation for the delay period attributable to the owner;
- The contractor has the burden of proof to establish (1) that the equipment was actually idle during the delay period and (2) that the equipment was necessary to complete the work;
- The proper measure of damages is the equipment’s actual rental value or the actual cost to own the equipment; absent such rate information, a rental rate book (such as the “Blue Book” or “Green Book”) may be used as a guide; and,
- Gross idle equipment damages must be reduced 50% to reflect lack of wear and tear.
Notwithstanding these limiting factors, the Ford decision is important. It further clarifies Kentucky law on delay damages and places Kentucky in the mainstream of American law regarding idle equipment.
This construction E-Alert is our last for 2014. We hope you find our E-Alerts helpful and we look forward to providing more for you in 2015. We invite your comments and suggestions.