QUESTION: Posted to "ASK A PROFESSOR" Pre-Award Procurement and Contracting on 2/20/01 by Jackie J
"The Scenario
Several line items on a Delivery Order have a variance between estimated quantities and actual quantities. Some variances are greater than 15% of the estimated quantities and some are less than 15%. Our interpretation of the Variation in Est Qty clause is when there is a variance of greater than 15%, the unit price can be renegotiated upon request by either party. The clause does not clearly state how to address simply the unit quantity issue (without addressing the unit price) when it is less than 15%.

QUESTION:
A DO line item has an est qty of 30 cubic yards. Ktr removed 32 cubic yards. Do we pay the ktr for removing 30 cubic yards (at the original unit price bid) or do we pay the ktr for 32 cubic yards (at unit price bid)? "

ANSWER: In specific answer to the question, you pay for the actual quantity at the contract unit price.

BACKGROUND: The Variation in Estimated Quantity Clause (FAR 52.211-18) addresses the right of either party to demand an equitable adjustment in the unit price, if the actual quantity of a unit priced item exceeds or underruns the estimated contract quantity by more than 15%. (The Clause also allows the Contractor to request a time extension, if such an overrun caused an increase in the contract performance period).

The clause is not intended to address how payment for actual quantities is measured or paid. This is usually addressed in a technical provision describing measurement and payment. If the contract uses a Government guide specification for exacavation, the technical spec will describe how to measure and pay.

Hope this helps you. Happy Sails!

By Anonymous on Monday, March 05, 2001 - 02:02 pm:

SCENARIO: Contract specifications require contractor to fill hole with rock. The schedule of items has estimated quantity of rock to fill hole at 2 tons. The construction VEQ clause is in the contract. The actual quantity of rock required to fill the hole is approximately 15 tons. The contractor doesn't notify Government and orders addtional 13 tons of rock and fills hole IAW contract specifications.

QUESTIONS: (1) Does VEQ apply? (2) Does a contractor have duty to inform Government of gross over/underrun quantities in situations such as above?

By joel hoffman on Monday, March 05, 2001 - 02:50 pm:

Normally not (assuming this is a unit-priced contract line item), unless somewhere else in the contract requires such notification. One key point was your statement that the Kontr filled it IAW contract specifications - it was within the scope of work.

Yes, the VEQ is applicable. However, there is no need for a unit price adjustment unless the cost per unit varied to fill a 15 ton hole versus a two ton hole. Sounds like one truck load of rock. I'd just pay for the 15 tons at the unit price - takes an admin mod to adjust the quantity and funding. I may not have all the facts. Happy Sails! Joel

By bob antonio on Monday, March 05, 2001 - 03:20 pm:

Joel:

My initial impression is that this does not fall within the intent of the VEQ clause because of the substantial change in quantity. I would look to either the changes clause or the differing site conditions clause. Under these clauses, the contractor is to provide notification.

I would have to do a bit more research on this.

By joel hoffman on Monday, March 05, 2001 - 06:39 pm:

Bob, if we were speaking of a substantial quantity, the discrepancy might possibly be worthwhile looking into, as a "cardinal change" or something else. However, 15 tons of rock is no more than one large dump truck load, vs. a small dump truck load for 2 tons. I don't think its worth the effort and expense to make a big deal out of it. Anon, are we talking about a substantial cost here? Is the unit price high? I doubt if the Government can negotiate much of a VEQ savings. Current case law supports the concept of only making a unit price adjustment if there is a substantial difference in the contractor's cost per unit for the first 2 to 3 tons and the next 9-10 tons. The bid unit price is not a factor. The Contractor's unit cost is probably not much different for 15 than for 2. The cost to both parties to process a mod is more than the savings or additional unit cost difference.

Now, if the contractor's unit price is outrageous, shame on whomever determined that the original price was fair and reasonable. Unit price bid items can be time bombs if there are overruns, and no - you don't "reprice" the overrun quantities at actual cost plus mark-up.

Happy Sails!

By joel hoffman on Monday, March 05, 2001 - 06:43 pm:

Anon, before assuming too much, here, please advise:
1)Is the rock priced as lump sum or unit price bid item?

2) If unit priced, what is the bid unit price?

Thanks, Happy Sails! Joel

By Anonymous on Tuesday, March 13, 2001 - 12:05 pm:

The scenario provided was hypothetical. I would outline a connection to actual projects but keep getting error messages. From the limited discussions above, I can see that the same questions come up when faced with this type of situtation, i.e., which clause(s) are applicable.

By bob antonio on Tuesday, March 13, 2001 - 12:14 pm:

Anonymous:
Are you trying to link to some documents?

By joel hoffman on Tuesday, March 13, 2001 - 09:23 pm:

Anon, perhaps reviweing the information, starting at page 7-15.5 found at

http://www.hnd.usace.army.mil/chemde/cap/s15.pdf

will answere some of your questions. I wrote this guidance , about sometime around 1994, after the Foley vs. US Court of Claims Case, on the same subject. The guidance is still legally current. Happy Sails! Joel Hoffman

By joel hoffman on Tuesday, March 13, 2001 - 09:46 pm:

For those of you who wonder what the above link discusses: It is a PDF file; there are two applicable subjects:

1) how and when do you adjust the unit price for an item due to an overrun or underrun of the estimated quantities?

2) how do you pay for overruns and underruns from the estimated quantities?
Happy Sails! Joel

By Anonymous on Wednesday, March 14, 2001 - 09:42 am:

Maybe it's just the length of what I was trying to send (4-5 paragraphs)? Shorter messages seem to work so... The actual problem we run into on our contracts is substantial quantity variations (such as the example provided) due to unknown conditions. We build rock riprap structures in marsh conditions and the rock settles or sinks during construction (and yes we do extensive geotechnical investigations of project sites prior to going to design). Our problem really isn't use of the VEQ clause, but what clause(s) apply when there is a substantial over or underrun. We have contemplated or actually used the VEQ, Changes, Differing Site Conditions, and Termination for Convenience clauses in the past. Our contracts for this work are FFP. The rock is unit priced on a per ton basis. Any suggestions to our contracting methods or when to use the above clauses are welcome.

By joel hoffman on Wednesday, March 14, 2001 - 04:55 pm:

Anonymous, it looks like you are uncomfortable with unit priced (FFP) contracts or bid items. The reason unit prices are used is because there will be variations. Yes, sometimes the variations will be large. Before you award the contract, you must ensure that the apparent succesful bidder's unit prices aren't so far out of whack that an overrun will be devastating.

The following is not personally addresed to you, Anon. If you have a competitively negotiated or sole source negotiated contract, there is no excuse for not being pro-active about this. Yes, bid contracts also require an analysis for reasonableness. The FAR requires it. I used to routinely do it in City work and private consulting for cities and developers, before starting work for the Govermment. I never understood why everyone in the Federal Government seems to look the other way about ridiculous unit prices, until there is an overrun. Then, "Oh, my! The unit price is too high!" This is precisely why Government contracting personnel must use a business approach - they must understand the contract they are awarding before they award it. Happy Sails! Joel Hoffman

By joel hoffman on Wednesday, March 14, 2001 - 05:30 pm:

Anon, it really is quite simple. If you award a unit priced contract item, you pay for the actual work performed at the unit price, unless their was a change which either added or deleted SCOPE OF WORK. Any work added or deleted by a change or differing site condition is to be separately priced from the originally described scope of work (the scope - not the "quantity of work" described).

The exception to the above rule is when there is no change or differing site condition, but there was an overrun or underrun, and there is a difference in the unit cost to the contractor to perform actual quantites outside of a band of 85-155% of the estimated quantity.

In the case of an underrun, the Contractor may well request an adjustment, if it didn't recover sunk costs (fixed, daily costs, mobilization costs, etc.). You then must compare the actual cost to perform less than 85% of the estimated quantity with what it would cost per unit had the Contractor performed 85% of the estimated quantity. Thus, the Contractor is guaranteed only 85% of its fixed or one-time costs, if there is an underrun.

In the case of an overrun, you compare the cost per unit to perform the quantity of work exceeding 115% of the estimated quantity to the unit cost for the first 115%. You pay for the first 115% at contract unit price. The Contractor is guaranteed the unit price for the first 115% (if no change in scope or differing site condition occurred).

You ask for an adjustment to the unit price to reflect any savings per unit realized by exceeding 115% of the estimated quanmtity, if any (ie., quantity discounts, mobilization costs, etc.) If there are no savings due to excess quantities, you pay for the overrun quantity at the contract unit price. All you need is an admin mod to increase funding and to adjust the estimated quantity up. There is no "change", unless new work was added to the scope.

The VEQ clause does not apply, unless there will be a demand by either party for a unit price adjustment, due to any difference in unit cost to perform actual work outside the 85-115% band. Simple as that. Happy Sails! Joel

By Anonymous on Friday, March 16, 2001 - 10:33 am:

Joel, at what point would you consider labeling a substantial over/underrun a "cardinal change"? Does cost play a factor here?

By joel hoffman on Friday, March 16, 2001 - 01:10 pm:

Anon, it's not cut and dry and depends upon each case. A cardinal change really occurs when the character of the work expected of the Contractor falls beyond what both parties could reasonably contemplate at the time of contract formation.

For instance, in a 1989 Engineer BCA Case, Bean Dredging Corp was awarded a contract for maintenance dredging (Miss. River? I forget) Between the time the contract was awarded
and the time of performance, a couple of hurricanes hit the area. As a result, the actual dredging quantities were something like triple the estimated quantity. There is no way that the parties contemplated this extra work. A differing site condition wasn't applicable, because the change in quantities occurred after award.

Neither party claimed a "cardinal change". The COE tried to hold Bean to its bid price, pursuant to the VEQ clause and Bean demanded a renegotiated price for the quantities above 115%, under the VEQ Clause.

The ENGBCA agreed with Bean that to hold them to the previous adjustment standard under the VEQ Clause (having to show that it cost more per unit for the overrun than for the first 115%), was unconscionable.

However, the ENGBCA didn't hold that there was a cardinal change. It fundamentally changed the way unit price adjustments under the VEQ Clause were priced ("repricing" overruns, based on actual cost). Well, there were a lot of problems with this ruling. One major problem was that they created a defacto "cost plus percentage of cost" method of payment for overruns.

To make a long story shorter, both the ASBCA and the Claims Court disagreed with the Bean Decision concerning proper adjustments under the VEQ clause.

In 1993's "Foley Vs. US." decision (a COE military contract, not civil works), the Court re-affirmed the old VEQ method ("the Victory" Decision). Although a Military contract decision, Claims Court decisions became applicable to contracts under the ENGBCA, thus negating the ENGBCA's 1989 methodology.

Nobody addressed whether the "Bean" case should have been considered a cardinal change. Had I been involved in that case, I would have argued that we really had a cardinal change in the scope of work. I suspect, had the case come up after the Foley Decision, it would have been treated as a cardinal change, not a VEQ problem.

As a bottom line answer to your question, each case is considered on its own merit. If the actual scope of work does not change from what was contemplated, and we're only dealing with an inaccurate estimated quantity, I would hold that there probably is no cardinal change. The basic principle is that each party has to live with the agreed unit price. Therefore, the importance of reviewing unit prices for bid items, prior to award, is absolutely crucial.

Hope this makes some sense. I've been dealing with VEQ's for a long time, and each case seems to be unique, in some respect! In commercial and local government work, we typically used an arrangement that the price would be re-negotiated, outside of 90-110%, if either party was dissatisfied with the contract unit price. That isn't the case in Government contracts.

But strangely enough, nobody still around knows why it evolved this way, in the Federal Government. The COE most likely developed this clause, many years ago. Most current construction clauses evolved from old COE/DOD policy before FAR. Happy Sails! Joel

By Anonymous on Friday, March 16, 2001 - 03:27 pm:

Thanks Joel, you've more than answered my question.