By: Larry Caudle
Most highway contracts include Variation in Estimated Quantity (VEQ) clauses that establish rules governing the renegotiation of unit prices if actual quantities vary from the government’s estimated quantities by a stated percentage, typically between 15% and 25%. Many VEQ clauses distinguish between “minor” and “major” bid items and allow adjustments for the former, but not the latter. Alternatively, a minor bid item might require a substantially greater variance in quantity than a major bid item before the unit price may be negotiated. In nearly all instances, a request for an increase or decrease in a unit price under a VEQ clause must be based upon an increase or decrease in costs due solely to the variation in quantity.
Contractors and state highway departments sometimes forget that the VEQ clause is not the only contract provision affecting quantity changes and that sometimes unit price changes are warranted, even when quantity changes are less than the threshold percentages stated in the VEQ clause. For example, in a case I highlighted several years ago, a state highway department improperly applied a VEQ clause to increased undercut quantities performed by the contractor. In that case, the contact contained a bid item for undercut within utility trenches because the department’s subsurface investigation, which was performed prior to the bid, identified the existence of some unsuitable materials. The contractor encountered a significantly greater amount of unsuitable soils than represented in the soils report, but since the undercut item was designated as a “minor” one, and the overrun was less than the threshold of 1,000%, the department refused to entertain a unit price change. The court disagreed and held that the Differing Site Conditions clause, in effect, trumped the VEQ clause because the additional quantities arose from differing site conditions.
Other cases have similarly held that the government cannot apply a VEQ clause to foreclose unit price changes when the additional (or reduced) quantities are attributable to changes in the work. Rather, pricing in such instances is governed by the contract’s changes clause. Accordingly, contractors must keep in mind that the VEQ clause is not the sole mechanism in the contract governing whether work must be performed at the contract unit prices bid. Frequently, other contract clauses apply and take precedence over the VEQ clause.
Once the VEQ clause is deemed properly applicable, the party seeking the unit price adjustment must prove that the contractor’s cost of performing the item of work has increased or decreased as a sole result of the variation in quantity. As the Maryland Court of Special Appeals determined in Genstar Stone Paving Products, Co., Inc. v. State Highway Administration, 616 A.2d 256 (1993), this can be shown only by comparing the contractor’s costs of performing the estimated quantity to the contractor’s cost of performing the added quantity. More importantly, how much profit, if any, the contractor is making on the work is irrelevant.
Genstar Paving involved a VEQ clause that allowed unit price adjustments for quantities varying by greater than 25% of the estimated quantity. When the estimated quantity for a variable message board bid item overran from 200 unit/days to 555 unit/days, the department sought a reduction in the unit price of $900, which it argued was $845 higher than the statewide average price bid for variable message boards. In the appeal, the department argued that once the contractor performed the original quantity plus 25%, additional units should be performed at a lower price because the contractor’s actual costs were significantly lower than its $900 bid price.
The court acknowledged that the contractor’s price was over eight times its actual cost. However, it held that the clear and unambiguous language of the VEQ clause restricted the inquiry to whether the contractor experienced a cost reduction as a sole result of the additional quantities. How much the contractor is profiting from the work is not to be considered. The appeals court, therefore, remanded the case to the trial court to make that determination.
What if the contractor had underbid variable message boards and it sought a price adjustment under these circumstances to offset its losses? Just as in Genstar, the inquiry would be restricted to whether the contractor’s costs for the added quantity increased as a sole result of such added quantity. Absent an increase in costs that could be tied solely to the increase in quantity, no adjustment in price would be allowed.
About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].
