Below is a "justification" received by one of our C.O.'s for approval to obligate additional funds against a contract. The "justification" was prepared by the head of our engineering section, concurred in by our second in command (head of programs) and approved by the head man of our division.

"JUSTIFICATION FOR OBLIGATING FUNDS TO COVER QUANTITY VARIATIONS: Contracts for the installation of structural works of improvement include a 'variation in estimated quantity' clause. This clause provides for the payment of up to 15% overrun in quantities of materials to be used in construction. Funds to cover this potential modification to the construction contract can no longer be held in a 'modification account'. Therefore, it seems prudent to obligate funds for each construction contract sufficient to cover the contract bid amount as well as the potential 15% quantity variation. This action is critically needed for contracts awarded near the end of a fiscal year which will be in construction before the allocations are made for the next fiscal year. Even a slight modification due to a quantity overrun during this time period when no funds are available could result in considerable 'down time' for a contractor and ultimately increase the cost of the project due to settlement of claims."

Any comments?

By joel hoffman on Tuesday, March 19, 2002 - 02:23 pm:

An obligation would require the contract to be modified, wouldn't it? Assuming so, the intent appears to be to increase all the unit priced estimated quantities to cover the liklihood of overruns.

If this is a Federal contract, the statement: "This clause provides for the payment of up to 15% overrun in quantities of materials to be used in construction" is incorrect.

If the Contractor has a 150% overrun for the contract described scope of work, it is generally entitled to payment. The VEQ clause doesn't have anything to do with entitlement to payment for actual work performed.

The clause simply says:

1) There will be no adjustment in the unit price for quantity variations within 85-115% of the estimated quantity for a unit priced line item.

2) If the actual variation is outside that band, either party may request an adjustment to the unit price for the quantity outside the 85-115% band.

3) The adjustment is based on the difference in the Contractor's cost per unit for the quantity outside the band, in comparison with its cost per unit for the quantity inside the band. This is called the "Victory Principle", based on the case (which confirmed the original intent of the clause).

The VEQ clause does not entitle either party to re-price the item from scratch, based on actual cost, negotiated cost or any other re-pricing technique, nor does it say that we only pay up to 115% of estimated quantities.

Therefore, if the actual quantities exceed the 15% "cushion" that the "head man" wants to place in the contract, it won't guarantee a cap in the overrun exposure.

Aside from that, if you mod the contract to add the 15% cushion, does the revised quantity then become the new baseline "100%" level for calculating a possible additional overruns or even underruns? happy sails! joel hoffman

By joel hoffman on Tuesday, March 19, 2002 - 02:26 pm:

I do realize that an additional object of the proposed action is to obligate funding, now, so money will be available, if there is an overrun. I just wanted to point out that the justification is based on unsound justification or reasoning. happy sails! joel

By C MERCY on Tuesday, March 19, 2002 - 02:47 pm:

In addition to Joels comments this seems to be a method for meeting the "antecedent liability" rule. I think such an allocation (15%) is excessive and would, in effect, unfund one of every six of your projects, Futhurmore, if those obligated funds were not properly consumed prior to the end of the contract, but in a new fiscal year, de-obligating them would render them unavailable for use.Under fiscal law in-scope changes have to be funded from the FY in which award was made,thus liability for in scope changes would never be tied to a future appropriation in the first place; thus justifying the action based on that premise is unallowable anyway.

By CMERCY on Tuesday, March 19, 2002 - 03:41 pm:

In the Summer 2000 edition of the Acquisition Quarterly Review you might consider the article " An Analysis Of The Management Reserve Budget on Defense Acquisition Contracts" by D Christensen and C. Templin

By Anonymous on Tuesday, March 19, 2002 - 06:05 pm:

No contract specialist had any part in writing, commenting, or reviewing the document. Management provided the document for the purpose of directing the contracting staff to obligate additional funds against a contract. Attached to the "justification" was the engineer's estimate and a breakdown showing the amount of "contingency funds" to obligate.

By Vern Edwards on Tuesday, March 19, 2002 - 06:31 pm:

All:

The question is not whether there is a valid justification for obligating funds, but whether there has been a valid obligation that must be recorded. If there has been a valid obligation, then it ought to be recorded by citing funds on a contract document. If there has not been a valid obligation, then citing funds on a contract document will not validly obligate those funds.

See the GAO's Principles of Federal Appropriations Law, Vol. II, Ch. 7, page 7-18, citing a case which suggests that the GAO would go along with recording an obligation to cover the maximum variation in estimated quantity:

"In a 1955 case, the Army entered into a contract for the procurement of lumber. The contract contained a clause permitting a ten-percent over-shipment or under-shipment of the quantity ordered. This type of clause was standard in lumber procurement contracts. The Comptroller General held that the Army could obligate the amount necessary to pay for the maximum quantities deliverable under the contract. 34 Comp. Gen 596 (1955). Here, the quantity was definite and the government was required to accept the permissible variation."

By joel hoffman on Tuesday, March 19, 2002 - 07:38 pm:

To clarify, my opinion is that the head of engineering mistakenly cited the VEQ clause as justification for the modification, stating that it "provides for the payment of up to 15% overrun in quantities of materials to be used in construction." It is not justification for obligating additional funds. The FAR VEQ clause doesn't have anything to do with authorizing overruns. It only provides a mechanism for a unit price adjustment. Somewhere else in the contract authorizes overruns, if they are, in fact, authorized.

I haven't otherwise expressed any opinion on whether oblogating extra funds is good, bad or otherwise.

The Head of Engineering must revise the justification. happy sails! joel hoffman

By Vern Edwards on Tuesday, March 19, 2002 - 09:55 pm:

Joel:

You may have to clarify some more. Here is the text of FAR 52.211-18, Variation in Estimated Quantity (APR 1984), which is for construction contracts:

"If the quantity of a unit-priced item in this contract is an estimated quantity and the actual quantity of the unit-priced item varies more than 15 percent above or below the estimated quantity, an equitable adjustment in the contract price shall be made upon demand of either party. The equitable adjustment shall be based upon any increase or decrease in costs due solely to the variation above 115 percent or below 85 percent of the estimated quantity. If the quantity variation is such as to cause an increase in the time necessary for completion, the Contractor may request, in writing, an extension of time, to be received by the Contracting Officer within 10 days from the beginning of the delay, or within such further period as may be granted by the Contracting Officer before the date of final settlement of the contract. Upon the receipt of a written request for an extension, the Contracting Officer shall ascertain the facts and make an adjustment for extending the completion date as, in the judgement of the Contracting Officer, is justified."

Underlining added.

The clause clearly doesn't say what you said it says; it doesn't require any adjustment to unit price, although that is often how the parties handle the matter. What the clause clearly does say is that if the actual quantity of a unit-priced item exceeds the estimated quantity by more than 115 percent, then the government will make an equitable adjustment "in the contract price." Furthermore, since the clause does not require the contractor to obtain the CO's approval before exceeding the estimated quantity, it clearly authorizes the contractor to exceed (overrun) the estimated quantity and to promise that the government will pay for any resultant increase in the contractor's cost. How else can you interpret it?

The clause does not say what the head of the engineering section said it says, either; it does not authorize payment for an overrun "up to" 15 percent, but in excess of 15 percent and without contractual limit. The lack of definiteness may be a problem with regard to recording an obligation, as suggested by my quote from the GAO's Redbook. But in my opinion the head of engineering was right to cite it. The indefiniteness problem can be managed by negotiating a cap in the government's obligation under the clause, requiring the contractor to notify the CO if the overrun will be more than a certain percentage (say, 20 percent) and requiring it to obtain the CO's permission before incurring cost for quantities in excess of the cap.

What VEQ clause are you reading? Have I got the wrong clause? If not, what have I got wrong?

By joel hoffman on Tuesday, March 19, 2002 - 10:48 pm:

Vern, you've got it wrong. There are a couple of articles in "Briefing Papers" from the 90's on the clause, its history and its meaning. I had them in my Mobile Al. files, but not at my current location. The prescription for use of the clause says "The contracting officer shall insert the clause at 52.211-18, Variation in Estimated Quantity, in solicitations and contracts when a fixed-price construction contract is contemplated that authorizes a variation in the estimated quantity of unit-priced items."

The contract otherwise authorizes a variation, normally in the technical specs, in the measurement and payment provisions. That part of the contract says we will measure and pay actual quantities up the pay line. The purpose of the VEQ clause is to indicate that variations within a +/- 15% range will not be cause for a unit price adjustment, but variations beyond that range can result in an equitable adjustment to the unit price. You don't need an equitable adjustment to pay actual quantities - we use admin mods for such purposes. The equitable adjustment only comes into play when there is an adjustment to the unit price. happy sails! joel

By Harley Hartley on Wednesday, March 20, 2002 - 10:10 am:

Although not exactly on point, here is how we handle variations on construction contracts when we become aware there will be a variation exceeding the estimated quantity. Assuming line item 0001 is for 100,000 cubic yards of dredging at $5.00 per, we would change as follows:
FROM:
0001 100,000 CY dredging @$5.00
TO:
0001 Dredging
0001A 100,000 CY (original estimate) @$5.00
0001B 15,000 CY (variation up to 115%) @$5.00
0001C 20,000 CY (variation above 115%) @$5.00
For payment purposes, the Government pays 75% of unit price for line item 0001C until the Government and the contractor agree to the final unit price for this item.
This method preserves 100,000 as the original estimate for determining applicability of the VEQ clause, allows us to increase the contract price and amount obligated, and allows us to continue to make payments when the quantity goes above the original amount. When the final quantity is known we do a final mod to set the quantity and, if necessary, adjust the price.

As I said, we only do this when we become aware there will be an overrun and have an estimate of the overrun quantity. I suppose you could use the same method just for contingency purposes but I'm a little wary of making an additional obligation without at least some idea of what additional quantities may be involved.

By Anonymous on Wednesday, March 20, 2002 - 11:12 am:

I believe the head engineer was basically trying to cover the known amount for an overrun, i.e., the additional 15% of the cost of an estimated quantity line item. There is the possibility of additional costs (or possibly less cost) to the Government if an item's quantity goes past the 115% mark.

Also, Vern, you indicated that it's possible to place a "cap" on an estimated quantity line item in a construction contract that includes the VEQ clause? Let's say the Government wants a rock structure built (we like rock) and the contractor stops construction when the cap limit of 120% is reached, but there's still another 25% of rock required to complete the structure. What happens next?

By Anonymous on Wednesday, March 20, 2002 - 11:21 am:

I meant head engineer was trying to plug-in the known amount of a "possible" overrun, in that we know what price will be for first 115%. Also, "additional cost (or possibly less cost)" is referring to adjustments in contractors unit cost.

By Anonymous on Wednesday, March 20, 2002 - 11:27 am:

HH--How come you do not include a line item under the estimate?

By Vern Edwards on Wednesday, March 20, 2002 - 12:16 pm:

Joel:

I see, and you're right. I forgot that you have to read the contract payment clause and the VEQ clause together.

So, couldn't the CO cite the payment clause (and perhaps some estimate of possible or likely overrun) as the basis for obligating additional funds, rather than the VEQ clause, since it's the payment clause that authorizes quantities in excess of the estimate?

Anonymous:

When the contractor reaches the cap he or she notifies the CO and the government engineer and they decide what to do next. If they are going to come up short on money they may have to redesign some part of the project to accomodate the funding shortfall.

By joel hoffman on Wednesday, March 20, 2002 - 12:43 pm:

Vern, your proposed method for obligating funds would be ok, from a contract admin standpoint. I haven't done any research on the propriety of obligating expiring funds, as a contingency. happy sails! joel

By joel hoffman on Wednesday, March 20, 2002 - 02:20 pm:

As I have said before, the VEQ Clause is one of the least understood contract clauses. It predates the FAR, as ASPR 7-603.27(?). It was known as "General Provision 64" or "GP 64" in our pre-FAR contracts. The current wording is essentially the same as the old clause. I believe that the COE wrote the old clause.

At any rate, we attempted to rewrite the clause in the mid 90's but found it so difficult and controversial that the attempt was abandoned.

Some wanted to re-price all work outside the band (common in my 1970's pre-Government experience - unit price was only binding for 90-110%, re-negotiable beyond that range).

Others just wanted to clarify what it means, without changing the philosophy that the unit price is binding for both parties, unless the Contractor's cost per unit varied for units outside the +/-15% range. But, it became too difficult to concisely cover all the different situations.

I asked if anyone knew the origin of the clause or the drafters and was told that the drafters were all gone and all the files thrown away.

It wasn't until the mid 90's that COE started writing mods to adjust the estimated quantities and "administrative contract price" to match actuals. That came about because the books were reflecting "110% progress, but the job is incomplete", and the funds paid would far exceed the listed contract amount. So, the bean counters said to line up the contract amounts and estimated quantities with actuals.

The policy for several years, was to write admin mods, until someone in Contracting advised that "SAACONS", the Army's dinosaur contract reporting system wasn't programmed to allow an admin mod increasing the contract price. So Contracting had been entering them as "Changes" in SAACONS.

I asked Army to change SAACONS. The Army said no, were getting rid of SAACONS, so no changes. Therefore, our Headquarters decreed we should write unilateral admin mods, but cite the VEQ clause as the 'authority', so that SAACONS could accept it. (They knew that the VEQ clause wasn't the authority, but had no other clause to cite for SAACONS, since it wouldn't work as an "admin mod".)

One still can't find much clear guidance in contract admin manuals or books on exactly why or how you adjust or don't adjust the unit price.

The only guidance came from the ASBCA and Court Cases. The Corps' Board of Appeals even contradicted ASBCA from 1989 until 1992 on the proper interpretation - until the Claims Court finally decided in favor of the ASBCA method (Foley vs. US 26 cl. ct 936 1992 - no re-pricing, adjustment only for the difference in the contractor's cost per unit between inside the band and outside the band units). We were doing adjustments one way for Civil works projects and the opposite way for Military projects!

Just a little history... happy sails! joel

By New2this on Wednesday, March 20, 2002 - 06:05 pm:

Perhaps the real question that needs to be resolved(and I think that is what the Engineer may have had in mind when he wrote the Justification
sited by Annonymous on Tues Mar 19)is what does a CO do if a modification is required and the allocations for the new fiscal year have not been received? Let's forget about the overrun and say the modification is the result of something other than an overrun. Sure the CO can tell management to forget about the additional work until funds are received and let the contractor move out to another site and begin work there. When funds become available and of course a price is negotiated between the CO and contractor for the additional work required by the modification and the contractor is required to mobilize to the site again. The price is going to be more than if he could have done the work while originally at the site. Years ago we had a modification "pot" that could be used to cover the above example and/or overruns. I know we can't obligate more funds than the contract is awarded for, but it sure would save a lot of grief if there was a way to have funds in reserve for modifications.

By joel hoffman on Thursday, March 21, 2002 - 08:31 am:

On commercial fixed price projects, it is not uncommon to include a bid item called "allowances" or "managment reserve", which could be used to fund inevitable changes. This is somewhat similar to a contractor's internal management reserve, within their budget - in this case, it is intended for added 'scope'.

Would such an idea be legal on a FFP Government contract? How would it be managed to avoid the cost plus percentage of cost trap or other pitfalls? Anyone have experience or thoughts on this?

On some of our contracts, we had lump sum bid items set up on an estimated cost, actual cost to be paid (e.g., utility to relocate certain lines or make certain connections, actual cost paid to the prime as a reimbursable expense.)

On some of our huge contracts to construct Chemical Weapons disposal projects, we set up a lump sum change time and material CLIN, against which we issued pre-authorized not-to-exceed work orders for recurring type small errors and omissions, interferences, etc. The authorization was based on an estimate, submitted by the Contractor. happy sails! joel

By Anonymous on Thursday, March 21, 2002 - 09:43 am:

Vern,

When Ktor halts work upon reaching cap, will the VEQ clause still be available for repricing additional work?

By Vern Edwards on Thursday, March 21, 2002 - 10:41 am:

Anonymous:

Sure. But depending on how you worded the contract with regard to the cap you may have to mod the K to raise the cap. You can write the cap to address specific items or to set a general cap.

By joel hoffman on Thursday, March 21, 2002 - 10:44 am:

Anonymous, can you please clarify this part of your question:

"...will the VEQ clause still be available for repricing additional work?"

Are you speaking of work already required by the contract scope, but exceeding the cap on funds?

Or do you mean extra work to be added?

By Anonymous on Thursday, March 21, 2002 - 02:43 pm:

Joel,

Yes to both.

I believe what I'm hearing is to include contract language for allowing the use of the VEQ clause for contract requirements exceeding the funding cap (if $ become available).

But if the Government decides to redesign the work (Vern said "...they may have to redesign some part of the project to accomodate the funding shortfall."), then some other clause other than the VEQ clause would apply, right?

By joel hoffman on Thursday, March 21, 2002 - 03:08 pm:

Anon, what I believe Vern meant was, if an overrun on unit priced items will exceed the total funds available for the contract, the Contract should include a notice provision, so that something can be deleted or modified to achieve the savings needed to pay for the overrun.

In that case, a change, under the changes clause, usually would be necessary to delete or modify the other work. Of course, the Contractor could alternately submit a Value Engineering Proposal under the VECP Clause to find the offset savings or some other clause might be applicable to save money.

The VEQ clause might still come into play, if it is determined that a unit price adjustment is necessary for the portion of the overrun exceeding 115% of the estimated quantity.

You are correct that other causes apply to changed work. The VEQ clause is generally inapplicable to adding new unit price work by change (unless, of course there is an underrun or overrun in the quantity of the added work!) One doesn't price new work via the VEQ clause.

Does this answer your question? happy sails! joel

By Anonymous on Thursday, March 21, 2002 - 04:04 pm:

Joel,

Not meaning to be hard-headed, but, am I correct on the point that the VEQ clause can be used for making equitable adjustments to those quantities exceeding the 115% threshold and the cap? (Assuming that the cap is beyond the 115% mark, the contractor makes a demand for an equitable adjustment, and the cap language has been written to allow such an adjustment.)

Also, I thinking the cap languge should be written to give the Government a little time to make their decision. Otherwise, couldn't the contractor make a case for a Government delay?

By joel hoffman on Thursday, March 21, 2002 - 07:25 pm:

Anon,
RE: your 1st question - if the Contractor's cost per unit to perform the quantity above 115% of the estimated quantity - assuming that this work is within original scope of the contract - varies from its cost per unit to perform the original work, the VEQ clause authorizes an equitable adjustment.

Example: It cost the Contractor $1.00 per cubic yard to perform the first 115% of the work and it cost $1.10/cyd for the overrun, the Contractor is entitled to an equitable adjustment of $0.10 per cyd, plus profit.

This is true whether the contract unit price is $0.50/cyd, $1.00/cyd or even $5.00/cyd. The adjustment is based on a $0.10 difference in unit cost.

RE: your second question: I suppose you can write a provision so that the Government can take time to make a decision. I'm not sure that it will indemnify the Government against additional costs. If the Contractor knows it will face delays while the Government obtains funds, it may include the anticipated delay costs in its unit price. If the language says there will be no additional costs for delays in obtaining funding, any smart contractor will probably include an allowance for those anticipated costs in its basic unit price.

But to answer your question "Otherwise, couldn't the contractor make a case for a Government delay?" YES, under the Suspension of Work clause, the Contractor is entitled to costs due to Government delays in administering the contract. The Contractor could also be entitled to a time extension under either the VEQ clause or the Defaults Clause.

The way we handle overruns, when we know additional funds are coming, is like this:

1) the contract already authorizes the work, even if it exceeds the estimated quantity.

2) We pay the Contractor for work performed.

3) By the time we reach payment for the total contract price, (remember, the job's not complete, yet) we add funding by a unilateral mod, revising the estimated quantities. If the new estimated quantity will exceed 115% of the original estimated quantity, we perform an analysis of the Contractor's unit costs to determine whether they are the same, more, or less (e.g., are mobilization and demob costs amortized in the 1st 115%?). If we are satisfied that there are no savings, no action is necessary. If we feel a discount is due, we hold back some retainage out of the overrun payment and make a demand for a credit.

If the money is not going to be available, we decide where to cut scope to pay for the overrun, like Vern described.


happy sails! joel

By Vern Edwards on Friday, March 22, 2002 - 08:54 am:

Joel:

Would you agree that the parties can reach a lump sum settlement under the VEQ clause instead of unit price adjustments?

By joel hoffman on Friday, March 22, 2002 - 09:55 am:

Vern, yes, I would agree.

We often used a lump sum CLIN to pay the adjustment. The adjustment was usually based on the difference in unit cost times the number of units involved (after the fact adjustments).

Sometimes, there are costs involved, which are easier to lump sum, than to amortize over each unit - e.g., having to mobilize additional equipment, time extension costs, unrecovered mobilization costs for underruns, additional costs to expand or open up borrow pits, dredge spoil areas, etc.

The basic principle is the same as the example I gave for illustrative purposes. Those costs can be spread over the affected units or lump summed. The point is that the additional units would cost more per unit or less per unit than the original estimated quantity. Underruns usually involve unrecovered sunk (one time), fixed or semi-variable costs.

The other main point is that it doesn't matter what the bid price is or what the actual cost is. We only look at difference in the contractor's unit cost for the units outside the 85-115% range vs. the unit cost within the range.

happy sails! joel

By Anonymous on Friday, March 22, 2002 - 07:53 pm:

Is it proper for an engineer to make such a justification. Why wasn't a contracting officer involved?