Construction contracts frequently authorize variations in estimated quantities of unit-priced items. The Variation in Estimated Quantities (VEQ) clause allows adjustment of unit prices if actual quantities vary significantly (i.e., more or less than 15%) from estimated quantities, and then it goes on to provide that the adjustment is to be based on changes in cost “due solely to the variation.” The question frequently arises whether the VEQ clause applies to all variations from estimated quantities, or whether another method of price adjustment may be used. We focus here on exceptions to the VEQ clause when variations occur.
Victory Construction Co. v. United States, 510 F.2d 1379 (Ct. Cl. 1975), holds 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.
In 1989, the Corps of Engineers Board of Contract Appeals distinguished Victory, holding a contractor entitled to an equitable adjustment under the VEQ clause when actual unit costs differed significantly from contract unit prices, although there was no evidence that the actual unit cost of the overrun quantity differed significantly from the actual unit cost of the estimated quantity. Bean Dredging Corp., ENG BCA 5507, 89-3 BCA ¶ 22,034. The Claims Court followed Bean Dredging in Burnett Construction Co. v. United States, 26 Cl.Ct. 296 (1992). The Burnett court held a contractor entitled to an upward equitable adjustment for a quantity overrun although the overrun did not increase unit costs.
Shortly after Burnett, the Claims Court reaffirmed Victory in Foley Co. v. United States, 26 Cl.Ct. 936 (1992). Foley explained that Victory rejected repricing under the VEQ clause based only on the fact of an overrun or an underrun, and noted that Bean Dredging had not correctly applied the clear language of the VEQ clause. Furthermore, the Foley court expressly noted that its decision in Burnett was inconsistent with Victory, and therefore should not be followed. Therefore, the Foley court reaffirmed Victory, holding 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).
In the wake of the Federal Circuit’s Foley decision, the right of a party to claim a price adjustment under the VEQ clause for quantity overruns or underruns appears settled for now. What Foley did not settle, however, is when a quantity overrun or underrun may be treated as a differing site condition or as a contract change, not as a variation under the VEQ clause.
Quantity variation clauses recognize that overruns or underruns beyond a certain percentage are per se a differing site condition, i.e., a material difference from the conditions suggested by the contract plans. The sole issue with an overrun or underrun is the quantity subject to equitable adjustment. In other words, an overrun or underrun beyond the percentages stated in the VEQ clause is a recognized subset of a differing site condition, and the only issue is the equitable adjustment due.
Morrison-Knudsen Co. v. United States, 397 F.2d 826, 842 (Ct. Cl. 1968), holds that “a standard article, incorporated in the agreement, cannot lightly be read out of it, or deprived of most of its normal substance” by using special clauses addressing variation in quantities. Morrison-Knudsen considered whether a significant overrun was to be adjusted under the VEQ clause, or as a contract change. Traditionally courts have held that standard mandatory clauses, such as the changes or differing site condition clauses, rather than quantity variation clauses, control in two situations: (1) where there is a large variation in quantity; or (2) where there is a large difference in the cost of performing the overrun or underrun. Courts generally limit the application of quantity variation clauses to “reasonable” quantity variations, pricing large or abnormal variations resulting from differing subsurface conditions under the standard differing site conditions or changes clauses.
This principle is at work in F.H. McGraw & Co. v. New England Foundation Co., in which the court addresses a quantity variation clause as follows:
The additions and deductions’ clause was clearly applicable only to those inadvertent errors or differences between careful and precise specifications and performance that will inevitably creep in where contracts involve vast amounts of labor and materials. It does not apply to a change of a substantial nature.’ Blair v. United States, 8th Cir., 1945, 147 F.2d 840, 847, modified 150 F.2d 676. Plaintiff is here attempting to deduct a sum determined by the unit prices of the additions and deductions’ clause from the lump sum price when 52/60ths of the entire work originally planned for the By-pass and Effluent Channel’ has been canceled. But this type of clause *** is limited in its meaning and effect, by reason, and by the object of the contract, to such modifications of the contemplated work as do not radically change its nature and its cost. ***’ Salt Lake City v. Smith, 8 Cir., 1900, 104 F. 457, 465. It is designed to cover a variation, not a transformation.’ (citation omitted).
210 F.2d 62, 66 (1st. Cir. 1954).
The Federal Circuit’s Foley decision provides no guidance here because the Foley court was solely addressing the VEQ clause, rather than weighing the applicability of that clause against the differing site conditions or changes clauses. In the decision below, the Claims Court expressly noted that its decision was carefully limited:
We conclude that this court lacks jurisdiction to address the Government’s defenses and counterclaims based on the Changes clause and the Differing Site Conditions clause because they were not the subject of a decision by the contracting officer.
26 Cl.Ct., at 939. Thus the Federal Circuit never examined the interplay of the differing site conditions clause, the changes clause, and the VEQ clause to decide which may be an appropriate pricing mechanism; or how the contract as a whole should be construed.
The differing site conditions clause may also apply, rather than the VEQ clause, in cases where the cost of additional units varies greatly from the contract price, no matter the reason for the increase. In United Contractors v. United States, the court held:
clauses of this type do not control when the cost of doing the extra work greatly differs from the stated unit-price because of factors not foreseen by either party. In that event, the Changed Conditions clause comes into play and overrides the Special Condition.
368 F.2d 585, 601 (Ct. Cl. 1966). Other tribunals have adopted this rule. Ray D. Lowder, Inc. v. N.C. State Hwy Comm’n, holds:
There is no obligation to proceed under sec. 4.3B [quantities clause]. That section decides how a contractor may be compensated; it does not dictate how he must be compensated. Although sec. 4.3B is designed to smooth over problems arising when overruns or underruns occur, it does not, by virtue of that fact, indicate that recovery is not available under sec. 4.3A [differing site condition] when the cost of doing unforeseen added work greatly differs from the stated unit price.
217 S.E.2d 682, 695 (N.C. App. 1975).
Similarly, in Continental Drilling Co., ENG BCA No. 3455, the Corps Board said:
A material variation, not reasonably foreseeable, between the quantity of work set forth in the contract and that actually done is a differing site condition within the purview of the Differing Site Conditions clause. Schutt Construction Co. v. United States, 173 Ct. Cl. 836 (1965). Neither the Variation in Estimated Quantities clause nor the Measurements and Payment clause has any effect on this legal principle when, as in the present case, the cost of doing the work differs significantly from the unit price in the contract.
75-2 BCA ¶ 11,541.
When the actual cost of unit price work differs greatly because of unforeseen factors, repricing is proper whether or not VEQ limits have been met. Furthermore, the repricing may apply not only to the overrun/underrun quantity, but may also include some or all of the original estimated quantity. See Loftis v. United States, 76 F. Supp. 616 (Ct. Cl. 1948); Dunbar and Sullivan Dredging Co., ENG BCA 3165, 73-2 BCA ¶ 10285.
The overriding principle, in deciding just how the respective clauses should apply in a given situation, is that the contract should be construed equitably. The Burnett court said:
In situations in which the variation clause is activated, however, normal principles of pricing equitable adjustments such as are utilized under other standard government contract clauses, should apply.
26 Cl.Ct., at 308. This means simply that an equitable adjustment under the VEQ clause should be decided in the same manner as an equitable adjustment under a standard clause such as the differing site conditions clause. See also B.J. Harland Electrical Co. v. Granger Brothers, Inc., 510 N.E.2d 765 (Mass. 1987). (Contract clauses to be construed in a harmonious and consistent manner). The availability of an equitable adjustment should not depend upon the choice of contract clauses.
Equity also requires flexibility. An equitable adjustment under the VEQ clause is “based on” an in- crease or decrease, but it is not the sole, mandatory measure. Thus Genstar Stone Paving Products Co. v. State Highway Admin., holds:
Apart from the determination of costs’, additional leeway is implicit from the equitable’ nature of the adjustment and the fact that it is merely to be based on’ and not necessarily equivalent to the cost differential. Keeping a contractor whole’ does not require that it be given an excessive profit based on its use of creative accounting in devising its item bid; nor does it allow the Board to cause injury to the contractor by refusing to compensate it for unit costs legitimately incurred by reason of a significant change in the scope of the work upon which the contractor bid.
The standard, being an equitable one, needs to be flexible in its application. It is not to be applied so rigidly as both the Board and the court, in their very different ways, applied it.
618 A.2d. 256 (Md. App. 1993).
Equity means keeping both parties whole. It does not require payment of an excessive profit nor that the contractor incur an unforeseen loss. There should be no penalty, nor windfall, to the contractor or to the agency. Thus, the concurring opinion in Foley says:
The parties did not bargain for, nor does an equitable adjustment permit, a windfall such as can occur under Victory or the majority’s independent interpretation of the clause.
11 F.3d at 1036. The Corps Board reached a similar conclusion in Constructora Disconsa, S.A., ENG BCA No. PCC-58 (Oct. 19, 1988):
The spreading of cost and inefficiency based on total estimated units is an accepted practice. The VEQ clause’s purpose is based on that assumption and is meant to prevent windfall profits or significant hardships by large changes in the estimated quantity stated in the contract.
The Corps Board applied the same rationale in Bean Dredging:
The theory behind the VEQ clause is that both parties expect to be bound to the contract unit price within a prescribed reasonable range of the estimated quantities but that large variations may require some adjustments to the unit prices or the total contract price to prevent either windfalls or losses, potentially even immense windfalls or ruinous losses, to the contractor.
In summary, while the Federal Circuit in Foley sets forth guidance for measuring an equitable adjustment under the VEQ clause, Foley does not require that all equitable adjustments for variations in quantity occur under the VEQ clause. The differing site conditions clause (and, in certain situations, the changes clause) can also apply and, in cases of large unforeseen overruns or underruns, may govern. All of the provisions of every contract must be construed in an equitable manner.
— Chris Jensen
Copyright © 1995 Kilcullen, Wilson & Kilcullen. All rights reserved.