Increase in Unit Price Item - Contractor wants more bonding

[Dan Wiesner]

I have a construction contract and we have nearly doubled one of the CLINs.  The contractor is wanting additional money for the increased bonding.  I would think that the bonding is built into his unit price in the CLIN.  I am looking for anywhere that this is in writing in the FAR. I have been doing this for 6 years now, and this is the first time a contractor has requested this.

The only thing we found in the contract to back this up are the FAR clauses requiring Bonds and Specs Section 01 22 00.00 10 Paragraph 1.3 Unit Price Payment Items:

Payment items for the work of this contract on which the contract unit price payments will be made are listed in the BIDDING SCHEDULE and described below. The unit price and payment made for each item listed constitutes full compensation for furnishing all plant, labor, materials, and equipment, and performing any associated Contractor quality control, environmental protection, meeting safety requirements, tests and reports, and for performing all work required for each of the unit price items.

 

Is this enough to say that Bonding is required for "performing all work for each of the unit price items."?

 

[joel hoffman]

If there is no separate CLIN for bonding, then it should be distributed over the entire contract price and line items. 

The bonding company will keep up with the contract payments and final contract amount. This is standard practice with bonding companies. I don’t remember if their bonding agency or the actual Bonding. company does it.

There is no entitlement to a separate increase in cost of the bonds. It’s an indirect cost of performance.

Also look at the Variation in Estimated Quantities Clause. 52.211-18:

“52.211-18   Variation in Estimated Quantity.

As prescribed in 11.703(c), insert the following clause in solicitations and contracts when a fixed-price construction contract is contemplated that authorizes a variation in the estimated quantity of unit-priced items:

Variation in Estimated Quantity (APR 1984)

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.

(End of clause)”

Note that “increase or decrease in costs” (generally) refers to the unit cost to perform the work.

EDIT: You asked: “Is this enough to say that Bonding is required for "performing all work for each of the unit price items.?” I don’t know if it is enough to say but what you said is true. It is also part of the cost of performing such bonded work. Thus, it would be reasonable to conclude that the unit price should include bonding cost because the bonding company will likely bill final the bond premium based upon the final price of the work performed. [See below]

I am eating breakfast at the Cracker Barrel right now and will elaborate later the forum. 

 

Edited February 17, 2021 by joel hoffman
Added second to last paragraph

[C Culham]

20 hours ago, Dan Wiesner said:

I have a construction contract and we have nearly doubled one of the CLINs. 

I am confused but my initial thought is that you seem to be saying that you should not pay the contractor.   I might agree if their bonding costs did not increase, but what if they did?  As Joel notes sometimes when a contractors contract increases by XX amount their bonding costs go up too.  Bonding companies require it.

Here  is a different thread in WIFCON that discusses bonding that might help....

 

[ji20874]

Who cares what the contractor wants?

Instead, here is the first question:  Is the Government (not the surety) requiring increased bonding?  Or, in other, more precise words, has the contract price (not the CLIN price) increased so that the penal sum of the bond is inadequate in the contracting officer's opinion?  If YES, has the contracting officer invoked the contract clause at FAR 52.228-2, Additional Bond Security?

If there is a NO anywhere in the above, then the contractor gets nothing as I see it.

If all of the above is a YES, -- the contractor should include its bond costs as part of its proposal for whatever the work changes were.  I am assuming that it is a fixed-price contract and that you don't have a separate CLIN for bond premiums based on your original posting.  If cost-reimbursement, then it is an allowable cost if it otherwise fits within FAR 31.201-2(a).

 

[joel hoffman]

The bonding company will likely charge the contractor more regardless of whether or not the government specifically  requires consent of surety for additional bonding. The point is that the unit price generally includes bonding because the work is bonded (under both the payment and performance bonds).

Now, if the magnitude of the unit priced quantity overrun  causes the bond RATE to go up (unlikely, based upon typical bond rate structure), the contractor could request an adjustment under the VEQ clause.

The VEQ clause might also be used by the government to request a credit adjustment for any net DECREASE in the cost per unit due to the contractor having recovered fixed costs or other one time spread costs that were included in the unit price. Examples could be job overhead costs (assuming that no overall time extension was necessary) and mob and demob costs for any equipment used for the unit priced work, other general conditions, etc.

It all depends upon the specific facts and circumstances of the scenario.

I was quite familiar with bonding company practices, variations in unit priced construction, etc. over a 40 plus year period. Dan, if you would like to discuss the specifics in more detail to put everything in perspective, you can contact me through the personal messenger and I’d be glad to help. It really does depend upon the overall contract and circumstances.

[Vern Edwards]

2 hours ago, ji20874 said:

Who cares what the contractor wants?

It's part of a CO's job to care.

@Dan Wiesner 

23 hours ago, Dan Wiesner said:

I would think that the bonding is built into his unit price in the CLIN.  I am looking for anywhere that this is in writing in the FAR.

I don't know of anything in FAR that requires the cost of bonds to be allocated to unit prices. I just spoke with a prominent attorney in private practice at a large firm who has handled a number of government construction contract claims. He said that he could not think of any reason why bond costs have to be allocated to unit prices.

Additionally I checked a surety industry website and found this:

Quote

 

Contract Surety Bonds and Unit Price Contracts

Surety bond underwriters look favorably at unit priced contracts. If the contractor’s estimates are good, they can significantly reduce the default risk for the contractor and surety bond company. They also allow both Owners and surety bond underwriters to benchmark the Contractors bid price with industry standards. These standard are published yearly by many reputable companies. Some contractors assume that there in no risk to Unit Price Contracts. Unfortunately, that is not true. Fuel, labor, material, and weather are still unpredictable. Additionally, Owner abuse could be a problem in Unit Priced Contracts if the quantity of work significantly exceeds the expected scope. Many contracts limit the quantities to a percentage above the estimate such as twenty percent. A bad unit price can add up to losses for a contractor and their surety bond company as quickly as a fixed price contract.

 

https://mgsuretybonds.com/types-of-construction-contracts-surety-bond-perspective/#Unit_Price_Contracts

At another website, I found this:

Quote

 

Here’s a list of costs that are commonly factored into unit prices:

Labor costs

Material costs

Overhead costs

Profit

Taxes

Permit and Inspection Costs

 

https://www.levelset.com/blog/unit-price-contract/#What_Costs_Go_Into_Pricing_a_Unit

And go here to see a form used by New York City for proposing change order unit prices on construction contracts.

https://www1.nyc.gov/assets/ddc/downloads/current-consultant-cm/contract-cost-proposal-for-change-order-on-unit-price-contracts.pdf

Look at the last block, which is for the unit price calculation, and includes a space labeled: "Additional Insurance or Bond Cost."

[joel hoffman]

There is nothing prohibiting a contractor from under pricing any line item. But since the contractor’s cost to perform the estimated quantity of work includes bonding, the contractors cost to perform additional quantities doesn’t cost more per unit than the estimated quantity.

The VEQ clause doesn’t allow a price adjustment merely because the contractor didn’t include all its cost in the contract unit price.

Now - if the additional quantities result from changes in the scope of work - that’s a completely different story.

As I said before, one has to have a complete picture to answer the question.

[Vern Edwards]

7 minutes ago, joel hoffman said:

But since the cost to perform the estimated quantity of work includes bonding, the contractors cost to perform additional quantities doesn’t cost more per unit than the estimated quantity.  

I don't understand that.

[joel hoffman]

The contractors cost to perform the estimated quantity of work in the line item includes the cost of the bond, regardless of whether or not the contractor included the cost of the bond in the line item unit price.

 

[joel hoffman]

The contractors cost to perform the extra work also will include additional bonding by the bonding company. But, unless the rate is higher for the overrun, the bond cost per unit won’t be any more for the overrun.

 

[joel hoffman]

The VEQ clause doesn’t provide for repricing the overrun based upon actual contractors cost .   See, for instance :

https://casetext.com/case/foley-co-v-us

I call it the “Victory Principle” based upon : 

https://casetext.com/case/victory-construction-co-inc-v-united-states

The Corps of Engineers Board of Contract Appeals in the Bean Dredging Appeal (application to Civil Works contracts)  turned that around but the ASBCA disagreed with the Eng Board.  The interpretation of the Clause was eventually resolved reverting to the Victory Principle. 

[Vern Edwards]

Did the OP say the contract includes a VEQ clause?

[joel hoffman]

55 minutes ago, Vern Edwards said:

Did the OP say the contract includes a VEQ clause?

We don’t know. It’s a construction contract. That’s why I said at least twice that we need to know the contract specific facts. 
 

FAR 11.703 (c) is the prescription for the clause:

“(c) 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.”

[joel hoffman]

What New York City contracts provide for isn’t relevant In WIFCON is it? 

[Vern Edwards]

Why not?

[ji20874]

2 hours ago, Vern Edwards said:

It's part of a CO's job to care.

Okay, but I wouldn't want caring to override the fair administration of the contract.  Nothing in the original posting leads me to believe the contractor is entitled to an upward adjustment in the contract price to cover increased bond premiums.  

[Vern Edwards]

28 minutes ago, ji20874 said:

Okay, but I wouldn't want caring to override the fair administration of the contract.  Nothing in the original posting leads me to believe the contractor is entitled to an upward adjustment in the contract price to cover increased bond premiums.  

No need to worry. The OP did not ask if the contractor is entitled to an upward adjustment, and no one has suggested that the contractor is entitled to an upward adjustment.

[ji20874]

Good.  The contractor seems to want more money, and I am glad we all agree that the contractor is not so entitled (at least, based on the information shared so far).

[Vern Edwards]

37 minutes ago, ji20874 said:

The contractor seems to want more money, and I am glad we all agree that the contractor is not so entitled (at least, based on the information shared so far).

Let's agree instead that we don't know whether the contractor is so entitled.