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VEQ Under-run Question


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I am involved in administration of a FFP construction contract that had a 50% under-run (actual quantity was half of the contract estimated quantity) for a unit price line item and the contract contained the VEQ clause (52.211-18). Per the measure and payment terms of the contract, that unit priced pay item was to be measured by the volume of actual excavation but also include the cost for three supporting activities (activities other than excavation such as vegetation removal).

The contactor is alleging that the three supporting items were essentially fixed and were required to be performed regardless of the amount of excavation and since the amount of excavation was less than expected, they were not able to recover those costs.

I could use the following guidance:

1. With the limited information provided and assuming that the alleged fixed costs were actually fixed, does the contractor’s premise seem to have merit?

2. What burden of proof does the contractor need to provide to substantiate that a revised unit price is warranted? I was thinking they would need to show how much they actually expended on the “fixed” items of work, which would therefore be spread over the under-run quantity.

3. If the unit price was revised, would the adjusted unit price apply to the entire amount of the under-run (contract quantity – actual quantity) or would the revised unit price only apply to the difference beyond the 85% amount (85% of contract quantity – actual quantity)?

Let me know if you need any additional information. Thanks.

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Have you read some earlier threads in this forum where I discussed underrun adjustments in some detail? See, for instance:http://www.wifcon.com/discussion/index.php?/topic/1371-value-of-quantity-variation-credit-to-the-government/?hl=%2Bvariation+%2Bestimated+%2Bquantities#entry11460

1. Yes.

3. The clause would only provide for an adjustment for the share of fixed costs in the units less than 85% of the estimated quantity. So I must assume that the contracor would either have accepted that risk or would have included some contingebncy in its unit price. It isnt entitled to recover all of its fixed costs or the share of the line item for 100% of the estimated quantity, however you end up pricing the adjustment.

2. Pricing the adjustment can be tricky for underruns. Generally, we don't reprice the work accomplished, but there could be exceptions. I would first look at the share of the bid item price that the supporting tasks would have represented because that is what the contractor would have been paid for had the quantities been aligned with the actual work..

If the actual marked up cost for the fixed work is less than its pro-rated share of the contract unit price, then I would base my negotiation objective on the marked up cost. If the contract unit cost is too low, then I might consider arguing that the contractor wouldn't have recovered its full costs if it had performed the estimated quantity only the prorated share of the unit price. I could argue that it would have lost (more?) money had 85% of the quantities been performed. I'm not stuck on that position, though.

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Sorry...had to take the dog out. According to the clause, "...The equitable adjustment shall be based upon an increase or decrease in costs due solely to the variation above 115 percent or below 85 percent of the estimated quantity."

What are the increased costs? Was the quantity of work involved for the three supporting tasks fixed, regardless of the amount of excavation? If so, then the cost per unit of excavation was higher than had there been at least 85% of the estimated quantity performed.

By the way, it is usually a bad idea to include a fixed quantity of work in the same line item as a variable quantity, such as excavation.

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Thanks for the quick reply. I have read other threads on this site regarding VEQs, but not link you provided.

In general terms, we agree that amount of work for the three supporting items was fixed, there are some caveats to that but not worth going into. I was thinking that if they could prove what their actual costs were for the fixed items of work, we could figure out what their actual "loss" was by doing this:

[actual costs for fixed items of work / actual under-run qyt. ] - [actual costs for fixed items of work / contract qyt.] = unrecovered unit cost

unrecovered unit cost x [85% of contract qyt. - actual qyt.] = equitable adjustment amount

Does that seem right?

Also, we have learned a lesson about incorporating fixed quantity items with variable quantity items in one line item....

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Guest Vern Edwards

Fixed costs in a unit price are usually part of indirect costs and the adjustment would be based on under-allocation. But in this case the fixed-cost for the three supporting items are not indirect costs, but direct costs. Those items should not have been included in the unit price for the estimated quantity covered by the VEQ clause. That was a dumb thing for the CO to have agreed to.

I would break out the three supporting items based on the contractor's original cost breakdown and create a separate line item for those costs at a firm-fixed-price. Then I would deal with the VEQ for the excavation separately.

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I agree with Vern's approach and using the contractor's cost breakdown, not actual costs.

I suspect that the excavation wasn't measured separately from the topsoil stripping and re-spreading, so that is why they are in the same CLIN . There are ways to separate topsoil from excavation, if you know the rough average depth of what topsoil you want to strip and re-claim/re-use (e.g., 6 or 8 inches). One can calculate excavation quantities by subtracting the topsoil depth from the original survey elevations.

Also, one can establish a separate CLIN for excavation of undercut and backfill of unsuitable soil, if that was part of the estimated quantities.

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