Government contract disputes can create significant challenges for businesses and government entities and can lead to delays, financial pressures, and damaged trust. These disputes typically arise over disagreements around contract terms, change orders, performance issues, or other challenges. In this article, we’ll explore the most common disputes between governments and businesses, how these disputes are typically resolved, and the role alternative dispute resolution (ADR) methods play in government disputes.
What is a Government Contract Dispute?
A government contract dispute involves a disagreement between a federal, state, or local agency and a contractor, such as a construction business. Disputes may also involve work performed by subcontractors or suppliers, although those parties generally have contractual relationships with the prime contractor rather than directly with the government.
These disagreements typically center around issues such as payment, performance, contract termination, or contract interpretation. In addition to dispute resolution methods such as arbitration and litigation, government disputes may involve specialized procedures, laws, or agencies for resolution. The Contract Disputes Act establishes the claims and appeals framework for many contracts entered into by federal executive agencies.
Government and federal contract disputes can arise in any industry where businesses and government entities have contractual partnerships. Common industries that involve frequent government contracts include construction, healthcare, energy and utilities, transit, and education. Some industries, such as defense and aerospace, typically involve contracts with the federal government, rather than state and local agencies. The rules, laws, statutes, and contract language at the center of a dispute can vary widely depending on the industry and the government agency or agencies involved.
It’s also important to note that contract disputes are only one type of government dispute. Other formal government disputes include labor and workplace disputes, environmental and post-disaster disputes, and accident and injury claims.
Common Types of Government Contract Disputes
Payment Disputes
Payment disputes are some of the most common types of disputes between government agencies and contractors. These conflicts typically center on unpaid invoices or delayed payments. Disagreements can also center on a government agency requesting a refund for an overpaid invoice. These disputes can arise due to unclear contract terms, administrative backlogs and delays, or miscommunication during the project.
Disputes Over Change Orders and Adjustments
Change order disputes typically center on schedule, scope, or pricing adjustments that arise during a project. Contractors and governments may disagree on whether the extra work or time resulting from an adjustment requires additional payment. These disputes often stem from a government request that didn’t include written notice or detailed specifications, or because a change wasn’t reported promptly.
Disputes Over Delays
Delays caused by either the contractor or the government agency can give rise to a dispute. Project delays can be caused by slow work or mistakes on the part of the contractor, or government actions or inefficiency that led to a project slowdown. Resolving disputes over alleged delays typically involves providing proof or documentation identifying which party and which tasks were late.
Disputes Over Termination
Disputes may arise over the termination of a government contract. These disputes typically center on whether the termination of the contract was justified due to poor performance, significant delays, or other issues. The contractor may initiate a formal dispute to seek resolution of unpaid invoices or expenses.
Performance Disputes
Government contract disputes over performance issues typically center on alleged poor-quality work or materials, or missed milestones. Government agencies may claim the work doesn’t meet the contract requirements or that progress was too slow. The contractor may argue that changes in scope, government delays, or unexpected site conditions led to delays or changes in work standards.
Disputes Over Contract Interpretation
Government disputes over contract interpretation typically center on ambiguous or conflicting language in the contract that led to disagreements over payment or scope of work. During the project or after completion, either the government agency or the contractor may notice certain terms of the contract don’t align with their expectations.
Strategies for Reducing Government Contract Dispute Risks
Government disputes can lead to increased delays and costs arising from a project. If a government is pursuing a dispute against a contractor and the dispute isn’t adequately resolved, there may also be more severe consequences than would arise during a typical B2B dispute. It’s generally in the best interests of businesses and government agencies to attempt to avoid disputes when possible.
When the procurement process permits negotiation, parties can work to clarify responsibilities and potentially ambiguous terms before the project begins. Another useful strategy to reduce risk is to maintain meticulous records and documentation and to make sure any adjustments or change orders are in writing. Maintaining adequate documentation may help avoid disputes over delays and unexpected changes. Informing the other party of delays, pricing adjustments, or change orders right away is another useful strategy to limit potential disputes and improve communication.
How Are Government Contract Disputes Typically Resolved?
Negotiation or Agency Review
Negotiation is the most informal dispute resolution method and often the first method parties attempt. In negotiation, the government agency and the contractor discuss possible remedies without a third-party intermediary. In federal contracting, a contractor may first seek a price, schedule, or other contract adjustment through a Request for Equitable Adjustment. If the issue is not resolved — or if the contractor elects to proceed directly under the formal claims process — the contractor may submit a written claim to the contracting officer for a decision. A government agency can also file a claim.
Formal federal claims are generally submitted to the contracting officer, who issues a decision under the applicable claims procedures. For state and local contract disputes, formal agency review processes are determined by applicable agency rules and laws governing the jurisdiction.
Mediation
Mediation is a form of ADR that the parties also may pursue, either through an ADR provision in their contract or by agreement after a dispute arises. Mediation is typically used after the initial negotiation fails or after a claim is filed. A neutral third party — the mediator — helps the parties to engage in constructive discussion and guides parties towards a resolution.
The mediation process provides structure to the discussion and can help parties determine the best path forward, but the parties must voluntarily and mutually agree to a settlement on their own terms. Federal agencies and boards of contract appeals maintain their own ADR programs, although private ADR providers may also be used when authorized. At the state and local levels, the availability and administration of mediation depend on the applicable contract, procurement framework, and jurisdiction.
Arbitration
Arbitration is the most formal type of ADR; it involves a neutral third party — the arbitrator — who examines the parties' arguments and evidence, often at a procedural hearing, and issues a binding award. Arbitration may be included in some public contracts or authorized after a dispute arises, but its availability depends on the government entity’s legal authority, the governing procurement framework, and the terms of the contract.
Administrative Appeals or Litigation
If a claim is denied and the matter is not eligible or appropriate for arbitration, it may proceed through administrative appeal channels. For federal disputes, this appeals process is established by the Contract Disputes Act. Administrative appeals avenues for state and local contract disputes are governed by the statutes, ordinances, or regulations specific to the agency and jurisdiction. Some government contract claims proceed before specialized boards or other administrative decision-makers, while others may be brought in court under the applicable statutory process.
After receiving a contracting officer’s final decision, a federal contractor may generally appeal to the appropriate board of contract appeals or bring an action directly in the U.S. Court of Federal Claims. State and local review procedures vary and may require parties to complete specified administrative processes before seeking judicial review.
State and local disputes usually take place in courts appropriate to the jurisdiction and are governed by state contract law, statutes, and local government codes. The government contract litigation process is more formal and often more costly than the previously mentioned methods of dispute resolution.
ADR Rules in Government Disputes
The ADR rules that apply to a government dispute depend on whether the dispute is addressed through administrative channels or through a private ADR administrator, such as the American Arbitration Association® (AAA®). The ADR rules governing a contract dispute that proceeds through administrative channels are determined by the applicable federal, state, and local level laws, the procedures of the applicable agency or board, and the terms outlined in the parties’ contract.
When the AAA administers a government dispute, the applicable procedures may come from an established AAA ruleset, a government-authorized program, or procedures tailored to the requirements of the agency, contract, and governing law. Because government disputes arise under many different statutory and contractual frameworks, no single AAA ruleset governs every government matter.
The Role of Private ADR in Government Contract Disputes
Although many government contract disputes are handled through negotiation, agency review, or administrative channels, governments also use private ADR services to address disputes. Whether a government dispute can be resolved through privately administered ADR, such as with the AAA, depends on the contract terms, the governing law, and whether specific statutory authorization permits it. When appropriate, the AAA works with the agency to meet the specific requirements of a government dispute and provides an administrative framework for governments and contractors to address such disputes.
How the AAA Supports Government ADR Programs
The AAA has extensive experience working with government agencies, legislators, and public officials to design and implement ADR programs. The AAA can serve as a technical resource in developing the dispute resolution framework reflected in legislation, regulations, executive orders, contracts, and other government initiatives.
At the AAA, we have a proven track record of resolving government disputes through consistent performance on a wide range of issues. Some of our state and federal ADR programs have been operating fairly and efficiently for decades. Learn more about how we administer government disputes, what types of disputes we address, and specific details on how we’ve helped government agencies and parties resolve disputes: