By David Gerland on Thursday,
December 05, 2002 - 11:56 am:
During performance of a contract we had three line items with
underruns that fall under the 85% threshold, hence the VEQ
clause applies. The contractor has not justified why the
decreased quantity has caused him an increased unit price. His
proposed method of estimating his increased cost is to show what
it actually cost him to perform the reduced quantity of work
(without overhead, profit, or bonds) thus yielding a new unit
price, then using that new unit price to calculate what it would
have cost him to perform the 85% quantity (it is interesting to
note that his new unit price is approximately 50% of the
original contract unit price). He then is asking for the
difference between that number and what he would have earned at
the contract unit price for the 85% quantity, i.e. lost revenue.
He states that his rationale is based on case law, ENG BCA No.
5944, 94-1, in which the Board held "..where a contractor seeks
a cost increase due to a quantity underrun on a unit price item,
the equitable adjustment typically is calculated by subtracting
the costs that would have been incurred (i.e. variable costs) in
connection with the underrun quantity from the lost revenue that
performance of the underrun would have provided to the
contractor at the contract unit price."
I believe that he first needs to justify how the decreased
quantity actually impacted his costs and then we should look at
the cost increase based on his costs, including any unabsorbed
overhead or other fixed costs, and add profit and bond costs.
Since it appears the contractor's actual unit price for the
decreased quantity, based on his proposal, is less than the
original contract unit price I do not believe he is due an
increase due to lost revenue or anticipatory profit. Any
thoughts on the proper way to reprice the unit priced item due
to the decreased quantity?
By joel hoffman on Thursday,
December 05, 2002 - 06:57 pm:
I'll try to research the cited case in the morning and get back
to you... happy sails! joel hoffman
By Vern Edwards on Thursday,
December 05, 2002 - 07:34 pm:
It's a little hard for me to figure out your contractor's
argument based on your account, but it sounds like he or she is
out to lunch.
The case he cites is Gulf Construction Group, Inc.; ENGBCA No.
5944, 5945; 94-1 BCA ¶ 26,525 (Nov. 23, 1993). Here is the full
quote, as pertinent to your question:
"The usual measure of an equitable adjustment is the reasonable
increase or decrease in the contractor's net costs (to which a
profit allowance is applied) caused by the compensable event for
which the equitable adjustment is due, e.g., a change or
differing site conditions. This process is variously described
as keeping the contractor whole or maintaining the contractor's
profit or loss position as it was before the occurrence of the
"The VEQ provision of the contract, as here applicable, states
that if the actual quantity of a unit-priced item varies by more
than 15% below the estimated quantity, an equitable adjustment
in the contract price and time for performance will be made upon
demand of either party. Any equitable adjustment is to be based
upon proof by [the contractor] of an increase in costs due
solely, that is, attributable to or caused by, the quantity
variation below 85% of the estimated quantity... .
"In general, where a contractor seeks a cost increase pursuant
to the VEQ provision for a quantity underrun, the equitable
adjustment usually reflects unrecovered fixed costs attributable
to non-performance of the adjustable or underrun quantities.
Savoy Constr. Co., ENG BCA No. 3789, 78-1 BCA ¶ 13,138; C.W.
Roberts Constr. Co., ASBCA No. 17070, 73-2 BCA ¶ 10,108
(contractor recovered the cost of inefficient labor and
unnecessary travel expenses during the last nine weeks of the
performance period on account of an underrun below 85% of an
estimated quantity for painting work).
"The effect of procuring construction services by use of
unit-priced payment items based on estimated quantities is to
establish a range of revenue the contractor can expect for the
work called for by the payment item. Recovery for a quantity
underrun generally may not exceed the contract price of the
adjustable or underrun quantities, i.e., the adjustable
quantities multiplied by the unit price. Assuming reasonably
priced payment items, the contractor's profit or loss position
is maintained by subtracting (1) the costs that would have been
incurred to perform the adjustable quantities, i.e., the
unperformed unit-priced work below 85% of the estimated
quantity, from (2) the revenue that such performance would have
provided to the contractor at the unit price agreed upon in the
That quote from the Corps of Engineers Board of Contract Appeals
is a pretty good mini-treatise about making equitable
adjustments under the VEQ clause.
By joel hoffman on Friday,
December 06, 2002 - 10:08 am:
Thankyou, Vern. David, the Contractor is not entitled to "lost
Your proposed approach appears to be correct, except that I
don't see any grounds for "unabsorbed overhead", if you are
referring to home office overhead, as calculated by the Eichleay
Formula. We need to be careful using the term "unabsorbed
overhead". It is a specific remedy for unreasonable,
unanticipated Government caused delays over a duration which was
uncertain during the period of the delay.
Unrecovered fixed site overhead, unrecovered fixed costs,
unrecovered sunk costs, in comparison with the situation where
85% of the quantities would have been performed - yes (the
Contractor would theoretically "absorb" 15% of unrecovered
costs). Home office overhead and profit, bond, etc. would be
added to those costs. But the concept of "unabsorbed home office
overhead" is not directly related to unit- priced underruns.
I still need to read the whole case, as about this time the ENG
BCA was in conflict with ASBCA concerning methodology for
adjustment due to overruns. The ENG BCA was using a different
standard ("Bean Dredging") than ASBCA ("Victory" method.)Fed
Court finally resolved the issue by agreeing with the ASBCA
("Foley" decision). happy sails! joel hoffman