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Value of quantity variation, credit to the government


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#1 chase

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Posted 09 November 2011 - 01:28 PM

This is a FIRM FIXED PRICE CONSTRUCTION CONTRACT with the VEQ clause (52.211-18) included with no limitation to a specified CLIN(s).

I have a situation where the estimated quantity of a CLIN per contract was three, due to an error in the specification. Ultimately, two were installed as actually required for construction. Therefore, %66.66 percent of the CLIN was installed. Since the variation in quantity exceeded +/- 15% of the estimated quantity, upon demand of the contractor as prescribed in FAR 52.211-18, is the contractor due an adjustment in the unit price for the two remaining units?

If the Contractor provided invoices that substantiated their actual cost plus a resonable profit to be less than the price of the deleted unit, should the government retain only the actual cost plus profit and NOT the entire unit price of the deleted unit?

The Contractor contends that the entire price of the deleted unit should not be retained by the goverment for the following reasons:
1. The actual cost was less than estimated and they should only offer credit for that cost plus reasonable profit only.
2. Since the proposal preparation costs, overhead, etc... are distributed througout the CLINS the unit price of the deleted unit is not reflective of its value only.
3. Variation in Estimated Quanity was in excess of 15%, thus there was an increase in the unit price.

Example:

The contract unit price for 3 items is $60,000.00 each ($180,000.00), of which 2 were actually furnished and installed due to error in the spefications.
The contractor has invoiced for 2 items at $60,000.00 each ($120,000)
The contractor has provided actual invoices that indicate the cost of the CLIN plus profit only to be $40,000.00.
The contractor contends that the government owes the contractor the balance of $20,000.00, citing due to the decrease of quantity above the 15% threashold caused and increase in the unit price of the 2 remaining units.

Is the contractor due the remaining $20,000.00 per the example above and how should this be addressed with the contractor? Should the price of the remaining two units be increased ($80,000.00 each unit) to balance the Total price to equal $160.000.00 ($180,000.00 minus $40,000)?

Thank you in advance for your knowledge and insight on this subject.

#2 ji20874

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Posted 09 November 2011 - 03:20 PM

Has the contractor made a demand, citing the clause at FAR 52.211-18?

From your posting, I understand the following--
( a ) The contract calls for an estimated quantity of 3 EA at a unit price of $60,000, or $180,000 total.
( b ) The contractor has delivered and installed 2 units.
( c ) The contractor has invoiced for $120,000 ($60,000 EA x 2 units delivered and installed).
( d ) The contractor has shown that its total incurred cost for the two installed units, plus profit, is $40,000.
( e ) The contractor wants an additional $20,000.

This doesn't make sense, so maybe I don't understand the facts. To me, ( c ) and ( d ) are not compatible statements.

Regardless, the question is whether the variation from an estimated quantity of 3 to an actual quantity of 2, and solely this variation, caused an increase in the contractor's cost for the 2. If the difference in contractor costs had any other contributing factor, then there is no adjustment under the 52.211-18 clause.

This clause could play if the item we're discussing is a specialty item, where a manufacturer will quote a price break between units two and three (for example, an order for 1 or 2 units will have a unit price of $50,000 each, but an order for three or more will have a unit price of $40,000 each). Another factor to consider is whether the contractor actually ordered and purchased the third unit, and if so, if it had a reasonable basis for doing so when it did. For example, if the contractor knew the quantities were estimates, perhaps it should have waited for the actual quantity to be discernible before placing its order with its supplier.

Does your contract incorporate FP-03, the DOT standard specification for roads and bridges? If so, FP-03 has differing language to deal with variations in quantity which are the result of an error in the specifications or plans.

#3 chase

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Posted 09 November 2011 - 04:34 PM

Has the contractor made a demand, citing the clause at FAR 52.211-18?

From your posting, I understand the following--
( a ) The contract calls for an estimated quantity of 3 EA at a unit price of $60,000, or $180,000 total.
( b ) The contractor has delivered and installed 2 units.
( c ) The contractor has invoiced for $120,000 ($60,000 EA x 2 units delivered and installed).
( d ) The contractor has shown that its total incurred cost for the two installed units, plus profit, is $40,000.
( e ) The contractor wants an additional $20,000.

This doesn't make sense, so maybe I don't understand the facts. To me, ( c ) and ( d ) are not compatible statements.

Regardless, the question is whether the variation from an estimated quantity of 3 to an actual quantity of 2, and solely this variation, caused an increase in the contractor's cost for the 2. If the difference in contractor costs had any other contributing factor, then there is no adjustment under the 52.211-18 clause.

This clause could play if the item we're discussing is a specialty item, where a manufacturer will quote a price break between units two and three (for example, an order for 1 or 2 units will have a unit price of $50,000 each, but an order for three or more will have a unit price of $40,000 each). Another factor to consider is whether the contractor actually ordered and purchased the third unit, and if so, if it had a reasonable basis for doing so when it did. For example, if the contractor knew the quantities were estimates, perhaps it should have waited for the actual quantity to be discernible before placing its order with its supplier.

Does your contract incorporate FP-03, the DOT standard specification for roads and bridges? If so, FP-03 has differing language to deal with variations in quantity which are the result of an error in the specifications or plans.



The contractor has cited 52.211-18 among the items 1-3 listed on my initial post.

Sorry for the confusion...

(d) should read " The contractor has shown the cost plus profit for one unit to be $40,000.00"

Basically, there is a $60,000.00 balance on the CLIN representing the value for the single unit not installed. The contractor has shown its actual cost plus profit would have been $40,000.00 for a single unit, and the remaining $20,000 is considered overhead and windfall. Inversly, if the cost would have been more the contractor would have asumed that liability.

The contract does not inforporate FP-03.

#4 joel hoffman

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Posted 09 November 2011 - 05:06 PM

This is a FIRM FIXED PRICE CONSTRUCTION CONTRACT with the VEQ clause (52.211-18) included with no limitation to a specified CLIN(s).

I have a situation where the estimated quantity of a CLIN per contract was three, due to an error in the specification. Ultimately, two were installed as actually required for construction. Therefore, %66.66 percent of the CLIN was installed. Since the variation in quantity exceeded +/- 15% of the estimated quantity, upon demand of the contractor as prescribed in FAR 52.211-18, is the contractor due an adjustment in the unit price for the two remaining units?

If the Contractor provided invoices that substantiated their actual cost plus a resonable profit to be less than the price of the deleted unit, should the government retain only the actual cost plus profit and NOT the entire unit price of the deleted unit?

The Contractor contends that the entire price of the deleted unit should not be retained by the goverment for the following reasons:
1. The actual cost was less than estimated and they should only offer credit for that cost plus reasonable profit only.
2. Since the proposal preparation costs, overhead, etc... are distributed througout the CLINS the unit price of the deleted unit is not reflective of its value only.
3. Variation in Estimated Quanity was in excess of 15%, thus there was an increase in the unit price.

Example:

The contract unit price for 3 items is $60,000.00 each ($180,000.00), of which 2 were actually furnished and installed due to error in the spefications.
The contractor has invoiced for 2 items at $60,000.00 each ($120,000)
The contractor has provided actual invoices that indicate the cost of the CLIN plus profit only to be $40,000.00.
The contractor contends that the government owes the contractor the balance of $20,000.00, citing due to the decrease of quantity above the 15% threashold caused and increase in the unit price of the 2 remaining units.

Is the contractor due the remaining $20,000.00 per the example above and how should this be addressed with the contractor? Should the price of the remaining two units be increased ($80,000.00 each unit) to balance the Total price to equal $160.000.00 ($180,000.00 minus $40,000)?

Thank you in advance for your knowledge and insight on this subject.


Chase, the VEQ Clause is one of the more misunderstood clauses and one with little published guidance. Back in the 1990's, due to evolving case law on the clause and for my job in construction contract administration, I did some research and helped develop guidance for the Army Corps of Engineers on this topic. Most of the litigation at the time concerned overruns of estimated unit-priced quantities but the principles generally would apply to underruns as well.

The basic concept of the Variations in Estimated Quantities Clause was described in "Victory Construction Co. v. United States", 510 F.2d 1379 (Ct. Cl. 1975). This case held that that the party seeking an adjustment under the VEQ clause must show that there are cost differentials between the estimated quantity and the overrun or underrun quantities, and that the adjustment “will be confined in amount to such cost differentials as are directly attributable to a volume deviation greater than 15 percent from stated contract quantities.” Id., at 1386. Victory held that, absent “exceptional circumstances,” agreed contract unit prices should not be displaced by a complete repricing based on actual costs plus a reasonable profit.

From 1989 to 1992 there were conflicting and confusing decisions which essentially promoted the concept of re-pricing the work that was outside of the 85-115% boundaries in the VEQ Clause at 52.211-18. However, in 1992, the the Claims Court reaffirmed Victory in Foley Co. v. United States, 26 Cl.Ct. 936 (1992). The Foley court held that without a showing that there are cost differentials between the estimated quantity and the overrun or underrun quantities due solely to the volume deviation, no adjustment to the contract price may be made. In 1993, the Federal Circuit affirmed the Claims Court’s decision. Foley Co. v. United States, 11 F.3d 1032 (Fed. Cir. 1993).

There are other nuances about whether or not the VEQ is really applicable or if some unusual circumstances could result in some other form of relief. Those are still unsettled.

But I will ask you what actually caused the "underrun". An underrun under the VEQ clause assumes that there is no "Change" in the required work that caused the underrun or overrun. It is intended to cover situations where the quantities are hard to precisely estimate, requiring some type of reasonable estimation to quantify the actual effort required. You said that this variation was "due to an error in the specification. Ultimately, two were installed as actually required for construction." Thus, could this actually be a "Change" under the Changes clause, caused by some type of defect in the specifications?

If such is the case, the equitable adjustment would seem to be based upon the Changes Clause (52.243-4, I assume), not the VEQ clause.

Let's first look at an adjustment under the the VEQ clause. You didn't say whether one or both parties or if nobody requested an equitable adjustment under that clause. One would pay for two units installed. We don't pay for the third item but one should then look to see if there an equitable adjustment is due because of the underrun. One would try to compare the Contractor's unit cost (irrespective of the contract unit price) to install only the 2 units vs. the unit cost to install at least 85% of the units. Since 85% is an impossibility here, in this case we must compare the cost to install 2 units vs. 3 units. We don't re-price the 2 items installed based upon the actual cost plus a mark-up. In other words, we leave the parties in the same bargaining position as they agreed to in the original contract award.

However - If three units would have been cheaper per unit to the contractor to purchase and/or install than two units, in addition to being paid the agreed unit price for installing the 2 items, the contractor could request an equitable adjustment based upon the increased unit cost to install 2 plus profit on that cost. The increased cost might also include costs that are spread over all work but unrecovered due to the UNDERRUN between actual and installing only 85% of the estimated quantity. Since that is impossible to install 85% of the items, then we'd look at ant unrecovered spread costs (e.g., share of G&A, share of overheads, mob, set-up costs to do the work, etc.) for the one item. A smart contractor might even throw in the "learning curve" efficiencies on installation costs for 3 versus 2 items. However, the contractor generally isn't specifically entitled to recover pre-contract proposal preparation costs, regardless of whether they are a G&A cost or a direct cost. And I would argue that if I have to pay for some unrecovered spread costs, I'm not going to pay for proposal prep costs for the change, since that is probably being performed by the people that you are paying the unrecovered site or other overhead and/or G&A cost for.

In the event that 2 items are cheaper to install per unit than 3 items, the Government may be entitled to an equitable adjustment based upon the net unit cost savings plus markups - after also subtracting any unrecovered costs as discussed above.

Now - if this is a CHANGE to delete one unit due to faulty specifications, we are looking for an equitable adjustment to delete one unit. In that case, the government would be entitled to a credit for the cost to install the deleted unit, had it been installed, plus credit on markups for G&A, profit and bond, etc. In addition, one must look at the impact on the unchanged work due to the change in accordance with the Changes clause. Again, did the Contractor's cost to install the other 2 items and/or anything else decrease or increase as a result of the change? Consider all impacts plus the applicable mark-ups on those credits or increased costs.

There is an exception under the Changes clause to the above methodology, if the three units are all "severable" items. Basically, that may mean that deleting an item has no effect on the overall cost or time necessary to complete the project - that the unit price includes no distributed costs that aren't non-recoverable. That's a simplistic view which the Contractor has already argued against in your scenario.

In the case of a Change under the Changes clause involving defective specifications for which the Government is responsible, the equitable adjustment shall include any increased cost reasonably incurred by the Contractor in attempting to comply with the defective specifications.

Finally, we must look at the time component of an equitable adjustment under either clause, which might result in a time adjustment and possibly a price adjustment.

So, you see that there are differences between the 2 clauses in entitlements and in how the equitable adjustment is determined.

The above are my initial thoughts, based upon the limited information presented - just the general considerations involved. Those might change, depending upon the specific circumstances. I don't initially agree with the Contractor's numbers, either.

#5 ji20874

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Posted 09 November 2011 - 05:47 PM

Based on the information that actual cost plus normal profit allowance for each installation is $40,000, I might extrapolate that the cost plus profit for two units is $80,000, and the cost plus profit for three units is $120,000.

Here, the contractor installed two and invoiced for $120,000 -- this is because the established unit price is $60,000, and $60,000 x 2 = $120,000. It seems to me you should pay that invoice at that amount. It is irrelevant that the contractor's actual costs plus normal profit allowance are only $80,000. Yes, the contractor is making a huge profit of more than $20,000 per unit, or $40,000 total. That's okay -- this is a firm-fixed-price contract. Maybe next time, you can negotiate harder.

Regarding the third unit, it seems to me you should not pay for it. The contract quantities were estimated, and the contractor didn't install it. You have not described that the contractor has proven its entitlement under the clause at FAR 52.211-18. Remember, the mere fact of an underrun doesn't create entitlement to an adjustment, and the contractor has to show that its increased costs for the two are SOLELY attributable to the decrease in quantity. If the contractor is saying it requires the $20,000 amount from the last unit because that amount covers overhead costs -- well, you haven't gotten that far yet -- the contractor first has to show that the unit costs of installing two are more than they are for installing three.

What's your opinion? Is the unit cost for two so much cheaper than the unit cost for installing three? You can answer this question by yourself or with your own Government engineers and others.

I asked earlier about FP-03 because it has differing language to deal with variations in quantity which are the result of an error in the specifications or plans. Your contract doesn't incorporate FP-03. So you still have a valid question that you might raise with your attorney about whether, in your case and based on your contract and circumstances, you should deal with the differing quantity under the contract's Variation in Estimated Quantity clause or Changes clause.

#6 chase

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Posted 10 November 2011 - 04:19 PM

The change occured due to the Bid schedule requiring 3 units (valves), but the drawings indicate only 2 to be installed. The actual scenario is that the contractor was to furnish and install these valves in an existing piece of equipment. There was nothing that prevented the instalation of 3 valves, but only 2 were required for function so that was the route taken. I would consider these "severable".

Under the changes clause (52.243-4), would this be considered a deductive change? In reviewing one refernece: Contracting with the Federal Government 4d (Margaret M. Worthington, Louis P. Goldsman), they cite Nager Electric Co., Inc. and Keystone Engineering Corp v. United States, 194 Ct. C. 835, May 14, 1971, 442 F. 2d 936. ; where the boards of contract appeals and the courts have taken the position that the proper measure of of a deductive change is the reasonable cost that would have been incurred for the deleted item, plus a profit on that cost. The remaining balance would be to the benefit of the contractor.

Although this seems to be more geared toward a complete deletion of a CLIN and not a partial deletion of one unit, wouldn't that still be a deductive change.

Nash and Feldman also cover this in Government Contract Changes 3d. If you have this reference, it is covered in Volume 2, Chapter 18:24. where this could be handled as a Deductive Change or a Convenience Termination. Both have slightly different ways of calculating the deduction, but both would result in a deduction less than the original unit price.

Change Pricing: (Deduct direct cost +overhead + profit) where this is driven by the cost of the deleted unit.

Termination Pricing: (Price out completed work + profit + settlement expenses) where this is driven by the units installed.

Thank you Joel and ji20874 for your comments.

#7 ji20874

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Posted 10 November 2011 - 05:10 PM

This doesn't sound like a deductive change to me -- the contractor could have installed two, or three, depending on the circumstances when it started work -- it installed two -- this sounds like a perfect use of the Variation in Estimated Quantities clause -- pay the contractor for two, and you're done (unless the contractor makes a good case for adjustment under the Variation in Estimated Quantities clause). In your first post, you clearly said the ESTIMATED QUANTITY was three -- everything I am writing is premised on the fact that the quantities in the schedule are understood to be estimates.

You must not confuse the contracting principles and the clauses. If a contractor is entitled to an equitable adjustment under a particular clause, you cannot use the principle of another clause to grant the adjustment. This is too much confusion.

If you have a change, use the equitable adjustment principle of the Changes clause. If you have a variation in quantity, use the equitable adjustment principle of the Variation in Estimated Quantities clause. Which do you have?

[btw, this is great discussion and great opportunity for learning]

#8 joel hoffman

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Posted 10 November 2011 - 06:19 PM

The change occured due to the Bid schedule requiring 3 units (valves), but the drawings indicate only 2 to be installed. The actual scenario is that the contractor was to furnish and install these valves in an existing piece of equipment. There was nothing that prevented the instalation of 3 valves, but only 2 were required for function so that was the route taken. I would consider these "severable".

Under the changes clause (52.243-4), would this be considered a deductive change? In reviewing one refernece: Contracting with the Federal Government 4d (Margaret M. Worthington, Louis P. Goldsman), they cite Nager Electric Co., Inc. and Keystone Engineering Corp v. United States, 194 Ct. C. 835, May 14, 1971, 442 F. 2d 936. ; where the boards of contract appeals and the courts have taken the position that the proper measure of of a deductive change is the reasonable cost that would have been incurred for the deleted item, plus a profit on that cost. The remaining balance would be to the benefit of the contractor.

Although this seems to be more geared toward a complete deletion of a CLIN and not a partial deletion of one unit, wouldn't that still be a deductive change.

Nash and Feldman also cover this in Government Contract Changes 3d. If you have this reference, it is covered in Volume 2, Chapter 18:24. where this could be handled as a Deductive Change or a Convenience Termination. Both have slightly different ways of calculating the deduction, but both would result in a deduction less than the original unit price.

Change Pricing: (Deduct direct cost +overhead + profit) where this is driven by the cost of the deleted unit.

Termination Pricing: (Price out completed work + profit + settlement expenses) where this is driven by the units installed.

Thank you Joel and ji20874 for your comments.


From the information that you provided, this does not appear to be a "severable bid item" comparable to the discussion in Nash and Cibinics' "Administration of Government Contracts, 4th ed. under exceptions to the "would have cost rule" on pages 666-667. In addition, the contractor already indicated that there are distributed fixed and sunk type costs included in the unit price for each valve, which could not be recouped if the item is simply deleted at its unit price.

Yes, you can delete one valve in a unit priced quantity and it is a "deductive change", if it is to be considered a change under the changes clause. It doesn't appear to be an underrun, if the scope of work specifically required replacement of two valves.

No, it is not a partial termination.

It is apparently a mistake in the bid schedule or lack of coordination with the final scope of work. Or perhaps might the bid schedule have included 3 valves in the event that another might have to be replaced, upon commencement of the actual work?

Since you work with the organization, you should be able to find out why they included three valves but the drawings only required 2 to be replaced.

You need to verify the cost plus profit and bond, had the contractor installed one valve, which the contractor said is $40k. Make sure that that includes all of its costs, including G&A plus bond and a reasonable profit. If the contractor did not save any of the distributed costs for site overhead or other like costs by not installing the valve, then those costs would not be included in the price of the deleted work.

As a deductive change, assuming that the total cost plus profit and bond expense (had the valve been bought and installed) would have been $40,000 as claimed, the equitable adjustment would be a credit of $40k. Then you pay the contractor any difference between that credit and the contract unit price for the valve replacement and the agreed credit for not installing it.

Note that handling this under the Changes clause will likely result in more cost to the government than handling it as an underrun under the VEQ clause. As ji20874 indicated, in handling a request for equitable adjustment under the the VEQ clause, you would pay for installation of 2 each, valves . Then the contractor would have to show how its costs increased to install the 2 valves vs. the 3 - or it might be able to show what sunk and fixed costs were included in the unit price that it couldn't recover by only installing 2 valves. The normal underrun philosophy is that the contractor would only be entitled to recover up to 85% of the fixed and one time costs that are related to the bid item due to an underrun. We don't guarantee recovery of 100% of the costs that would have been spread over 100% of the estimated quantity. - but that is impossible because it could not install 85% of the estimated quantity. It was either 100% (3 valves) or 67% (2 valves). So, here - I think that it could recover the full 33% remaining of those costs - assuming that it is an underrun.

I'm still not sure that it is an underrun. However, if this contract follows the UCF, then the Order of Precedence clause at 52.215-18 indicates that the Schedule overrules the other documents and specifications in the case of inconsistencies - another reason I don't like the UCF for construction type contracts. It would seem that the Schedule indicates three while nothing in the rest of the contract required three valves to be replaced! So - is it an "underrun" or a change? I wish we knew why the discrepancy is there. Good Luck.

Again - these are musings. I don't know all the facts.

#9 chase

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Posted 16 November 2011 - 02:34 PM

This has been a great discussion and has assisted me tramendously! Thank you. I look forward to our next discussion.




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