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Line Items Below Threshold under Variation in Estimated Quantities Clause
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:

David:

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 compensable event.

"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 contract."

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 revenue."

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

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