Equitable Adjustment

[duke38]

Has anyone ever had a case where the contractor agreed on a certain price for an item then during contract performance they were able to find that item considerably cheaper so they delivered the cheaper version which was acceptable, however a change order was issued for a different syle item at a price that was higher than what the contractor found but it was still cheaper than what was agreed upon in the base contract. Is the contractor entitled to an equitable adjustment even though the change order item is still cheaper than the original contract? Also the contractor did not have to sign a certificate of current cost. If there are any GAO cases similar to this or any websites that would have information please let me know so I can research this as much as possible. Thanks

[Guest Vern Edwards]

You need to be clearer about what you mean by "item." Was it a specified, separately priced deliverable or was it a component that was not separately priced?

This is not the kind of issue that the GAO would address. It is the kind of issue that would be addressed by a board of contract appeals or the Court of Federal Claims.

[Don Mansfield]

duke38,

Let me see if I understand.

1. You and the Government agreed to a price for an item (let's say $100).

2. During performance, the item cost you less than you expected (let's say you estimated $90, but it actually cost you $50).

3. The Government issued a change order and now it's going to cost you more, but not more than you originally estimated for the original item (let's say $80).

Is that correct?

If your contract contains a Changes clause, and my understanding of your facts is correct, you would be entitled to an equitable adjustment for the increased cost of performance. The measure of the adjustment would be the difference between what it would have cost you to perform the contract without the change ($50 in my example) and what it will cost you to perform the contract as changed ($80 in my example)--an increase of $30. Your original cost estimate for the item ($90) is irrelevant when determining the amount of the equitable adjustment.

For more on pricing equitable adjustments, see Volume 4, Chapter 6 of the Contract Pricing Reference Guides at http://www.acq.osd.mil/dpap/cpf/contract_p...nce_guides.html.

[Guest Vern Edwards]

You have to be careful here, Don. If the item was severable and separately priced, and no work was done, and the change deleted it and replaced it with a new severable and separately priced item, then the equitable adjustment in your example might be to delete $100 and add $80, which would be a price reduction of $20. See Cibinic, Nash, and Nagle, Administration of Government Contracts, 4th, at 666. See also Government Contract Changes, 3d, ? 16:16. As the authors of the second book, Nash and Feldman, point out, the case law is not clear. Your formula is generally true, but not always, depending on the circumstances. The coverage of this topic provided by the Contract Pricing Reference Guides is thin and incomplete.

[duke38]

duke38,

Let me see if I understand.

1. You and the Government agreed to a price for an item (let's say $100).

2. During performance, the item cost you less than you expected (let's say you estimated $90, but it actually cost you $50).

3. The Government issued a change order and now it's going to cost you more, but not more than you originally estimated for the original item (let's say $80).

Is that correct?

If your contract contains a Changes clause, and my understanding of your facts is correct, you would be entitled to an equitable adjustment for the increased cost of performance. The measure of the adjustment would be the difference between what it would have cost you to perform the contract without the change ($50 in my example) and what it will cost you to perform the contract as changed ($80 in my example)--an increase of $30. Your original cost estimate for the item ($90) is irrelevant when determining the amount of the equitable adjustment.

For more on pricing equitable adjustments, see Volume 4, Chapter 6 of the Contract Pricing Reference Guides at http://www.acq.osd.mil/dpap/cpf/contract_p...nce_guides.html.

You are close. The $100 price was agreed upon at the start of the contract without any certified current cost signed by the contractor. However the contractor made a mistake in the $100 estimate, they were able to get the item for $50, however after a short perfomance period the government has since issued a change order for an replacement item that is estimated to cost $90. What should the equitable adjustment be if at all?

[joel hoffman]

You are close. The $100 price was agreed upon at the start of the contract without any certified current cost signed by the contractor. However the contractor made a mistake in the $100 estimate, they were able to get the item for $50, however after a short perfomance period the government has since issued a change order for an replacement item that is estimated to cost $90. What should the equitable adjustment be if at all?

I'm going to chime in here and agree with both Don and Vern. Don has described the basic concept for pricing equitable adjustments for changes, as defined in Case law that is around 50 years old and Vern has described certain exception to the general rule.

[Guest Vern Edwards]

Since you did not answer the question that I asked, I cannot answer yours. If this is important to you, you should seek professional advice.

[Don Mansfield]

duke38,

You need to answer Vern's question:

You need to be clearer about what you mean by "item." Was it a specified, separately priced deliverable or was it a component that was not separately priced?

My answer to you could change depending on your answer to him.

[duke38]

duke38,

You need to answer Vern's question:

My answer to you could change depending on your answer to him.

The item was a seperatley priced item that was used as a component to build a end item. The original item was coated in gold at $100 each now the specifications has changed to silver coated items at $90 each. Keep in mind the contractor had found the gold coated items at $50 each because of a mistake in their pricing. They delivered some of the $50 gold coated item and now that the government issued a change order for silver coated items at $90 each the contractor wants an equitable adjustment.

[duke38]

You need to be clearer about what you mean by "item." Was it a specified, separately priced deliverable or was it a component that was not separately priced?

This is not the kind of issue that the GAO would address. It is the kind of issue that would be addressed by a board of contract appeals or the Court of Federal Claims.

The item was a seperatley priced deliverable item that was used as a component to build a end item. The original item was coated in gold at $100 each now the specifications has changed to silver coated items at $90 each. Keep in mind the contractor had found the gold coated items at $50 each because of a mistake in their pricing. They delivered some of the $50 gold coated item and now that the government issued a change order for silver coated items at $90 each the contractor wants an equitable adjustment.

[Don Mansfield]

duke38,

Ok. Then I am going to stick with my original comment. You would be entitled to an equitable adjustment for the increase in your actual cost of performance (What it is going to cost you to comply with the change - $50).

I am basing my answer on something called the "would have cost" rule. Under that rule, the measure of an equitable adjustment is the difference in the actual cost of performance before the change (what it would have cost) and the cost of performance after the change (what it will cost). Original estimates of cost are irrelevant when applying this rule.

Vern brought up an exception to the "would have cost" rule, which applies if a severable, separately priced item is deleted in its entirety. However, I don't think that the exception applies because you have already delivered some of the items that are being deleted (i.e., the deletion of the line item is not entire). The cases dealing with that exception are not very clear, but I do not think that they would apply in your case.

[duke38]

duke38,

Ok. Then I am going to stick with my original comment. You would be entitled to an equitable adjustment for the increase in your actual cost of performance (What it is going to cost you to comply with the change - $50).

I am basing my answer on something called the "would have cost" rule. Under that rule, the measure of an equitable adjustment is the difference in the actual cost of performance before the change (what it would have cost) and the cost of performance after the change (what it will cost). Original estimates of cost are irrelevant when applying this rule.

Vern brought up an exception to the "would have cost" rule, which applies if a severable, separately priced item is deleted in its entirety. However, I don't think that the exception applies because you have already delivered some of the items that are being deleted (i.e., the deletion of the line item is not entire). The cases dealing with that exception are not very clear, but I do not think that they would apply in your case.

Thanks for your help