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#21 Vern Edwards

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Posted 29 September 2010 - 07:30 AM

This thread may have gotten confusing to some people. I?m going to try to explain it. If you already understand all of the issues, you might want to skip this post.

Fixed-price construction contracts may be priced on a lump sum or unit-priced basis, or on the basis of some combination of the two methods. See FAR 36.207.

Construction costs are usually estimated by reviewing the project drawings and calculating the kinds and amounts of work to be done, then pricing that work. Those calculations are called ?take offs.? However, some work, such as site preparation excavation, cannot be estimated precisely. When that is the case, it may be fairer to both parties to initially price such work on a unit basis, such as for cubic yards of earth to be removed or cubic yards of imported material (?borrow?) to be emplaced, and to pay the contractor for actual quantities. When the contract will include such unit-priced items, separate line items are established for each such item. Offerors are told (a) to propose unit prices based on an estimated quantity stated in the solicitation and (b) that payment to the contractor will be based on actual quantities at the unit prices. An offeror?s total price includes the product of the of estimated number of units for each such item, multiplied by the proposed unit price.

When a construction contract total price includes unit-priced items and payment is to be made on the basis of actual quantities, there are two potential pricing issues: first, there is the method of measurement of the actual quantities of each such item; second, there is the determination of the unit price to be paid when actual quantities vary from estimated quantities. If you are familiar with cost-volume-profit analysis, it will be apparent why the unit price might be an issue.

SAE 84?s original question was about the first issue⎯the determination of the quantity on which basis payment is to be made. That is the issue in interpreting FP-03 and the Forest Service supplement. The problem is caused in SAE 84?s case by the language of the supplement. I discussed that in my posts number #8 and #10, above. SAE 84 did not raise an issue about unit price. However, because of Joel?s response to something that Jacques wrote, Jacques and Joel have lately been talking about the Variation in Estimated Quantity (VEQ) clause, FAR 52.211-18, which addresses only the second issue: the equitable adjustment of the unit price based on variations in quantity exceeding +/- 15 percent. As Joel has pointed out, the VEQ clause does not address the determination of the quantity of work on which payment is to be based.

Here is what the VEQ clause is about: When actual quantities vary from the solicitation estimate, the variation in quantity may affect the contractor?s cost. The VEQ clause provides that if actual quantity varies from estimated quantity by more than +/- 15 percent, and if that variation in excess of +/- 15 percent affects the contractor?s costs, then either the government or the contractor is entitled to an ?equitable adjustment? of the unit price of the units above or below the +/- 15 percent. The adjustment is limited to the effect of the variation in excess of +/- 15 percent. Other causes of increased costs are excluded. The adjustment is made only to the unit price of the quantity in excess of +/- 15 percent, not the total quantity. You will find a more extensive discussion of the VEQ clause in Administration of Government Contracts, 4th ed., Chapter 5, Section VIII, pages 532 and 534 ? 536.

To illustrate, suppose that the contract (a) calls for an estimated quantity of 100,000 units at a price of $10 per unit, (b) says that the contractor will be paid at the unit price for the actual number of units, and ( c) includes the VEQ clause, which provides for an equitable adjustment to the unit price when actual quantity varies from estimated quantity by more than 15 percent. Now suppose that the actual quantity turns out to be 125,000 units, a 25 percent variance. The result is that the contractor will be paid for 115,000 units at $10 per unit. In addition, if the contractor can show that the additional 10,000 units caused its costs to increase by $5 per unit, it will be entitled to $15 per unit for those units. (I'm leaving out profit for the sake of simplicity.) Entitlement and quantum are based on the effect of that last 10,000 excess units, not on the first 15,000 excess units.

Interpretation of the VEQ clause had been controversial for a number of years. The full meaning of the clause is not apparent on its face. However, I think it was largely settled by the Court of Appeals for the Federal Circuit in Foley Co. v. U.S., 11 F.3d 1032 (1993), which was based in part on a precedent set in Victory Construction Co. v. U.S. 510 F.2d 1379 (Ct.Cl., 1975).

#22 formerfed

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Posted 29 September 2010 - 07:35 AM

Thanks Vern for explaining it. I thought I understood the issues but your post showed me I didn't. I learned a lot.

#23 joel hoffman

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Posted 29 September 2010 - 08:13 AM

This thread may have gotten confusing to some people. I?m going to try to explain it. If you already understand all of the issues, you might want to skip this post.

Fixed-price construction contracts may be priced on a lump sum or unit-priced basis, or on the basis of some combination of the two methods. See FAR 36.207.

Construction costs are usually estimated by reviewing the project drawings and calculating the kinds and amounts of work to be done, then pricing that work. Those calculations are called ?take offs.? However, some work, such as site preparation excavation, cannot be measured precisely. When that is the case, it may be fairer to both parties to initially price such work on a unit basis, such as for cubic yards of earth to be removed or cubic yards of imported material (?borrow?) to be emplaced, and to pay the contractor for actual quantities. When the contract will include such unit-priced items, separate line items are established for each such item. Offerors are told (a) to propose unit prices based on an estimated quantity stated in the solicitation and (B) that payment to the contractor will be based on actual quantities at the unit prices. An offeror?s total price includes the product of the of estimated number of units for each such item, multiplied by the proposed unit price.

When a construction contract total price includes unit-priced items and payment is to be made on the basis of actual quantities, there are two potential pricing issues: first, there is the method of measurement of the actual quantities of each such item; second, there is the determination of the unit price to be paid when actual quantities vary from estimated quantities. If you are familiar with cost-volume-profit analysis, it will be apparent why the unit price might be an issue.

SAE 84?s original question was about the first issue?the determination of the quantity on which basis payment is to be made. That is the issue in interpreting FP-03 and the Forest Service supplement. The problem is caused in SAE 84?s case by the language of the supplement. I discussed that in my posts number #8 and #10, above. SAE 84 did not raise an issue about unit price. However, because of Joel?s response to something that Jacques wrote, Jacques and Joel have lately been talking about the Variation in Estimated Quantity (VEQ) clause, FAR 52.211-18, which addresses only the second issue: the equitable adjustment of the unit price based on variations in quantity exceeding +/- 15 percent. As Joel has pointed out, the VEQ clause does not address the determination of the quantity of work on which payment is to be based.

Here is what the VEQ clause is about: When actual quantities vary from the solicitation estimate, the variation in quantity may affect the contractor?s cost. The VEQ clause provides that if actual quantity varies from estimated quantity by more than +/- 15 percent, and if that variation in excess of +/- 15 percent affects the contractor?s costs, then either the government or the contractor is entitled to an ?equitable adjustment? of the unit price of the units above or below the +/- 15 percent. The adjustment is limited to the effect of the variation in excess of +/- 15 percent. Other causes of increased costs are excluded. The adjustment is made only to the unit price of the quantity in excess of +/- 15 percent, not the total quantity. You will find a more extensive discussion of the VEQ clause in Administration of Government Contracts, 4th ed., Chapter 5, Section VIII, pages 532 and 534 ? 536.

To illustrate, suppose that the contract (a) calls for an estimated quantity of 100,000 units at a price of $10 per unit, (B) says that the contractor will be paid at the unit price for the actual number of units, and ( c) includes the VEQ clause, which provides for an equitable adjustment to the unit price when actual quantity varies from estimated quantity by more than 15 percent. Now suppose that the actual quantity turns out to be 125,000 units, a 25 percent variance. The result is that the contractor will be paid for 115,000 units at $10 per unit. In addition, if the contractor can show that the additional 10,000 units caused its costs to increase by $5 per unit, it will be entitled to $15 per unit for those units. (I'm leaving out profit for the sake of simplicity.) Entitlement and quantum are based on the effect of that last 10,000 excess units, not on the first 15,000 excess units.

Interpretation of the VEQ clause had been controversial for a number of years. The full meaning of the clause is not apparent on its face. However, I think it was largely settled by the Court of Appeals for the Federal Circuit in Foley Co. v. U.S., 11 F.3d 1032 (1993), which was based in part on a precedent set in Victory Construction Co. v. U.S. 510 F.2d 1379 (Ct.Cl., 1975).


Thanks, Vern. I'm glad to see that there is finally a reference which may explain what I call the "Victory Principle" for overrun adjustments, using the FAR VEQ Clause. For years there was really no explanation of how to consider the adjustment in any of the contract admin references, unless one went directly to the case law.


Then, for about 3-4 years or so, the issues were complicated by the 1989 "Bean Decision" (Corps of Engineers Board of Contract Appeals ENG BCA 5507, 89-3 BCA, 22034), which applied to USACE Civil Works contracts.

The ASBCA didn't recognize the Bean method (required repricing of additional quantities outside the 115% range based upon actual cost for the requested adjustment). So we had two conflicting methodologies for Military vs. Civil Works contracts. The Claims Ct. Complicated things for awhile, but eventually reaffirmed Victory in 1992's Foley Decision.

The Foley Decision finally settled the matter, rejecting the Bean methodology and applying the Victory Principle to the adjustment.

The Bean Decision was bad case law because it essentially established cost plus percentage of cost as the method to reprice overruns.

I think that the ENG Board was trying to find a way to help the Contractor cope with a massive overrun in dredging quantities that were deposited by 2 hurricanes after the contract was awarded. The Board couldn't apply the Differing Site Conditions Clause, because the conditions weren't pre-existing. They occurred after award.

I'm going to have to break down and buy the 4th Edition of "Administration of Government Contracts", I guess!

#24 Vern Edwards

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Posted 29 September 2010 - 08:30 AM

Bean Dredging Co., ENGBCA 5507, 89-3 BCA ? 22,034. Nash and Cibinic discuss the Victory and Bean principles at length in The Nash & Cibinic Report, "Variation in Estimated Quantity Clause: Groping for Meaning," 3 N&CR ? 65 (September 1989). They discuss Foley in "Postscript II: Variation in Estimated Quantity Clause," 7 N&CR ? 71 (December 1993).

#25 joel hoffman

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Posted 29 September 2010 - 08:45 AM

Bean Dredging Co., ENGBCA 5507, 89-3 BCA ? 22,034.



At any rate, the VEQ clause in FAR (52.211-18) is not germaine to the issues that SAE 84 raised. I only brought it into the discussion after a poster mentioned it in the context of crafting a clause to cover "contract quantity" variations. There is a huge misconception that the VEQ clause authorizes actual quantities when they vary from the estimated quantity. As Vern and I said earlier, the VEQ clause doesn't authorize payment for actual quantities and doesn't apply to the hybrid type lump sum line items that the Forest Service has developed.

Sorry if I confused folks. I didn't want to get into the mechanics or background of the VEQ clause. I have a folder over 2" thick in my file cabinet on the topic. If you think overruns are "fun", that ain't nothin' compared with underruns! Although I've dealt with Civil Works, building and horizontal facilities, I have to say that dredging contractors are the masters of creative thinking concerning overruns, underruns, differing site conditions or just about any other contract admin matter.

#26 Vern Edwards

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Posted 29 September 2010 - 09:29 AM

Unit pricing can cause confusion.

Sometimes the contract stipulates a specific quantity of units and a unit price, and the government wants exactly that number of units, no more and no less. If actual quantity varies from the specified quantity, you have a breach or a constructive change and some settlement may be necessary.

When the contract stipulates an "estimated" quantity and a unit price, the parties need to decide what they are going to do if the actual quantity varies from the estimate. Again, there are two pricing issues: (1) for how many units will the contractor be paid and (2) what if any adjustment will be made to the unit price if the variance affects the contractor's costs. (There may also be schedule issues, but that is another story.)

Finally, even when the contract does not include a VEQ clause, contractors have obtained relief for variances through the differing site conditions clause. See Administration of Government Contracts, 4th ed., pp. 533-534.

#27 joel hoffman

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Posted 29 September 2010 - 01:44 PM

Unit pricing can cause confusion.

Sometimes the contract stipulates a specific quantity of units and a unit price, and the government wants exactly that number of units, no more and no less. If actual quantity varies from the specified quantity, you have a breach or a constructive change and some settlement may be necessary.

When the contract stipulates an "estimated" quantity and a unit price, the parties need to decide what they are going to do if the actual quantity varies from the estimate. Again, there are two pricing issues: (1) for how many units will the contractor be paid and (2) what if any adjustment will be made to the unit price if the variance affects the contractor's costs. (There may also be schedule issues, but that is another story.)

Finally, even when the contract does not include a VEQ clause, contractors have obtained relief for variances through the differing site conditions clause. See Administration of Government Contracts, 4th ed., pp. 533-534.


In addition to the situation where the nature of the work is different due to actual conditions vs. those represented or reasonably expected, the DSC might well apply when the actual and estimated quantities are grossly disparate that the nature of the actual work was totally different than the expected work. For example, equipment and tool sizes are usually matched to the expected quantity of work. Different sized or different equipment and methods are often required for bigger or smaller jobs.

Otherwise, the philosophy for the VEQ clause under the "Victory Principle" is essentially this: Both parties agreed to a unit price that was was considered fair and reasonable at the time of contract formation, so both parties should live by it. It doesn't necessarily matter whether the contractor is making a windfall or is performing at a loss. The clause does provide for an adjustment if the unit cost to the contractor to perform the work outside the 85-115% band varied from the contractor's unit cost for quantities within the band. But the adjustment is an addition or deduction from the contract unit price to account for the difference in in the Contractor's UNIT COST - not the difference in the contract UNIT PRICE.

Wouldn't you know it - I ordered the 4th edition of "Administration of Government Contracts" before lunch. Upon my return, I pulled out my third edition and it covers the topic (pp 537-542). B)

#28 Vern Edwards

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Posted 29 September 2010 - 02:13 PM

Well, I'm sure that the authors of the 4th edition will appreciate your order. B)

Vern

#29 joel hoffman

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Posted 29 September 2010 - 03:47 PM

Well, I'm sure that the authors of the 4th edition will appreciate your order. B)

Vern


In hardback no less. My first soft cover edition was stolen in Saudi Arabia (by a contractor). I bought the second edition at a college bookstore s a replacement when I was home one summer. I gave that one away and bought the third edition from CCH in hardback. They ought to LOVE me...




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