Establishing Commercial Impracticability Based on Cost Overruns

July 17, 2025 Sareesh Rawat, Esq.

Contractors may sometimes encounter unforeseen conditions that make a government contract commercially impracticable because performance would cause extreme and unreasonable difficulty, expense, injury, or loss. Unless the contractor has assumed the risk of the unforeseen condition, a finding of commercial impracticability excuses the contractor from performing. In other situations, commercial impracticability may be treated as a constructive change, warranting an equitable adjustment due to the substantial, unforeseen costs imposed upon the contractor. Whether the performance of a contract would be commercially impracticable is a question of fact to be resolved on a case-by-case basis. Therefore, adjudicative forums have consistently declined to adopt a bright-line rule providing that a certain percentage of cost overrun automatically constitutes commercial impracticability. However, due to the potential for abuse, the standard for establishing commercial impracticability is challenging to meet, and contractors are not entitled to relief merely because they are unable to sustain their profit margins.

In Armed Services Board of Contract Appeals (ASBCA) No. 63615, a decision issued on May 19, 2025, the Board granted the agency summary judgment on the issue of commercial impracticability when the contractor suffered a 37% cost overrun on a construction contract. The U.S. Army Corps of Engineers (USACE) issued the underlying contract for construction work at Placement Area No. 10 in the Corpus Christi Ship Channel. The total adjusted contract price following all modifications was $11,046,369.04. During performance, the contractor encountered excessive erosion on the south side of the placement area. Subsequently, the work to address the erosion was added to the contract via two bilateral contract modifications addressing the inland and shoreline sides of the placement area, totaling $909,332.04. However, even after the modifications, the contractor continued to incur costs and expend additional resources. A year after the contract was deemed substantially complete, the contractor submitted certified claims asserting entitlement to roughly $3,560,723.65 in cost overruns for work associated with the first modification and $447,522.64 in cost overruns for the second modification. These claims were denied by the contracting officer (CO) in their entirety.

Among other counts of its complaint in the appeal before the ASBCA, the contractor alleged that the work associated with the modifications became commercially impracticable due to the continued excessive erosion. The contractor alleged that the work was commercially impracticable because unforeseen conditions had caused a 328% cost overrun. The contractor calculated the overrun by comparing the amount it spent to perform both modifications (~$4.1m) to its original estimate for the modification work (~$909k). Meanwhile, USACE asserted that the actual cost overrun was no more than 37%, which it calculated by comparing the total alleged cost of contract performance (~$15.1m) to the total adjusted contract price (~$11m). Thus, the contractor and USACE employed different methodologies to calculate the cost overrun. The contractor essentially compared a subset of the alleged actual costs to its initial estimate for the modified work. In contrast, the agency compared the total alleged actual costs to the total adjusted contract price. In resolving the issue of conflicting cost overrun calculation methodologies, the Board cited precedent from the Federal Circuit and its own past decisions, holding that commercial impracticability was more appropriately determined by comparing the total alleged cost of performance to the total contract price. In other words, the Board agreed with the agency’s calculation of the cost overrun as 37%.

Upon establishing the 37% cost overrun, the Board turned to the parties’ arguments regarding whether the overrun in the present case was sufficient to establish commercial impracticability. The agency cited several instances in which cost overruns greater than those in the present case were found insufficient to establish commercial impracticability. Specifically, the agency provided examples where cost overruns in excess of 50-70% were considered inadequate. The agency also demonstrated via examples the high bar a contractor had to meet to establish commercial impracticability based on cost overruns alone. For instance, the Board found commercial impracticability when the expected project cost rose to over $400 million rather than the originally planned $16.92 million. Thus, the agency maintained that the contractor’s 37% cost overrun in the present case, although significant, did not meet the high bar required in such cases. The ASBCA agreed with the agency, noting that the cases cited by the agency effectively demonstrated that cost overruns of a significantly greater magnitude than those alleged by the contractor were required to establish commercial impracticability. While the Board declined to adopt a bright-line rule that a 37% cost overrun could never be sufficient to constitute commercial impracticability, as it is a factual inquiry to be resolved on a case-by-case basis, it reminded the contractor that the standard for establishing commercial impracticability was nevertheless a rigorous one. Consequently, summary judgment was granted in favor of the agency on the issue of commercial impracticability.

Contractors may establish commercial impracticability by demonstrating that, due to unforeseen events, the contract can only be performed at excessive or unreasonable costs. In government contracts, commercial impracticability may be treated as a constructive change, warranting an equitable adjustment. However, due to the doctrine’s susceptibility to abuse, the standard for establishing commercial impracticability is a rigorous one. Notably, when calculating cost overruns in the context of commercial impracticability, contractors should compare the total alleged cost of performance to the total contract price. Furthermore, contractors should be mindful that commercial impracticability is a question of fact, not law, which means that it must be determined on a case-by-case basis. As demonstrated in this case, as well as the examples cited by the agency in support of its position, even cost overruns of 50-70% may not be considered exorbitant if unsupported by evidence of additional circumstances indicating impracticability. In any event, the doctrine cannot be invoked simply because the contractor’s incurred costs have become greater than initially contemplated.

This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.

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Establishing Commercial Impracticability Based on Cost Overruns

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