Builders and Contractors Exchange
Weekly Bulletin: 29 Mar 2004
Recovering material Cost Increases on VDOT and NCDOT Contracts
By: Pat Genzler
This is the 4th Article in a series on the impacts of increased metals prices on the construction industry.
Many "unit priced" construction contracts, and specifically VDOT and NCDOT contracts, offer specific clauses that a contractor may use to recover part of its increased costs of materials under some circumstances - principally where there is changed work or significant increases in quantities involved.
"Force Account" Work
While VDOT and NCDOT contracts have "changes" clauses, they also contain provisions for "Force Account" work. This is work that is outside the scope of the original contract and is directed by the engineer. Both NCDOT and VDOT "Standard Specifications" provide specific methods for reimbursing a contractor for force account work, and as with changes, it is based on "actual cost." VDOT Specification 109.05(b) and NCDOT Standard Specification 109-3 provides for reimbursement of a contractor's "actual cost" for materials for force account work, plus a 15% markup for overhead, profit and miscellaneous items.
Overruns and Underruns in Contract Quantities
VDOT and NCDOT contracts also incorporate standard provisions allowing a contractor to revise his contractual unit price for "excessive" overruns in contractual estimated quantities. NCDOT defines what line items are considered "major items" in each contract. For major items, all quantities in excess of 115% of the contract estimated quantity are eligible for repricing, and for all other items, quantities in excess of 200% of the estimated quantity can be repriced. As explained in NCDOT Standard Specification 104-5, the revised unit price is based on the contractor's actual cost for the extra work. Therefore, increased material prices incurred because of overruns in quantities (which may be beyond a contractor's arrangements for the project) can be recovered. VDOT Specification 104.02 has a similar provision allowing repricing quantities for "major items" that overrun or underrun contract quantities by more than 25%, and allows repricing by force account methods based on the contractor's actual cost.
Economic Price Adjustment Clauses
Both VDOT and NCDOT are considering adopting limited "economic price adjustment" (EPA) provisions for their contracts. These are based on a proposal by AASHTO, and in the draft stage at this point. Current drafts are limited to only certain steel items, such as reinforcing steel, structural steel, and signs, so they would not offer complete solution to the problem. The drafts under consideration would allow an increase in the unit price for designated steel items based on the contractors actual increase in costs, subject to three important limitations. First, the contractor would have to absorb the first 10% increase in its unit cost for the steel items. Secondly, adjustments above 10% would be allowed only if there was an equal or greater percentage increase in a national Bureau of Labor Statistics Producer Price Index (BLS PPI) for scrap steel. If the BLS PPI percentage increase is less than the contractor's actual cost increase, the BLS PPI percentage would control. Finally, an absolute cap of 50% increase in costs would be imposed, and contractors would not be able to recover cost increases above 50%. While this EPA clause is a step in the right direction, it clearly leaves contractors vulnerable to steel price increases in other items, and to local or regional fluctuations in steel prices that may not be reflected in the national PPI index.
As advised in our prior articles on this topic, contractors should always review their particular contract closely and may want to seek legal advice regarding their rights to recover increased material costs.
Questions?
If you have any questions about this article or any other related matters, please contact:
This article is meant to bring awareness to this topic and is not intended to be used as legal advice.