Builders and Contractors Exchange
Weekly Bulletin: 05 Apr 2004
Recovering Escalated Material Costs In Contract Changes
By: Pat Genzler
This is the 5th Article in a series on the impacts of increased metals prices on the construction industry.
Whether or not a contractor can recover unexpected increases in material prices as part of its principal scope of work, a contractor can usually recover those higher costs for changed work. And, any delays caused by unavailable materials for changed work should entitle the contractor to an appropriate time extension if the changed work is on the "critical path" - e.g. the change would result in a delay to the overall contract completion. That is because in federal contracts, VDOT contracts, and many commercial contracts, the contractor is entitled to an "equitable adjustment" based on its actual costs and actual time for performing the "changed work."
Pricing an "Equitable Adjustment"
One authority on public contracts has defined "equitable adjustment" as:
"A fair price adjustment under a contract clause for changed work including an adjustment in profit, a change in the delivery schedule, and a change in any other affected terms of the contract. ... The basic formula for an equitable adjustment is an estimate of the difference between (1) what would it have required to perform the work as originally required, and what it will reasonably cost to perform the work as changed." Nash, Schooner & O'Brien, The Government Contracts Reference Book, 2d Ed. 1998, p.215.
The key point is that an equitable adjustment is based on the contractor's actual costs for the changed work, even if those costs are much higher than his original estimate or bid price. Furthermore, the Armed Services Board of Contract Appeals has held that even if a contractor bid a contract at a loss on the original scope of work, the contractor is entitled to an equitable adjustment including profit on his increased costs of performing changed work. Stewart & Stevenson Servs. Inc, ASBCA, 97-2 BCA ¶29,252 (1997).
For commercial contracts, AIA Document A201-1997, General Conditions of the Construction Contract, is similar in its scheme for pricing changes. It allows an equitable adjustment, including "... reasonable allowances for overhead and profit ...," based on the contractor's costs including "...costs of materials, supplies and equipment, including cost of transportation ...."
Of course, contract language may change the components of an equitable adjustment. For example, VDOT's standard specifications for Alterations of Quantities or Character of the Work (Sec. 104.02) or Differing Site Conditions (Sec. 104.03), provide that in the event that changed conditions "cause an increase or decrease in the cost or time required for performance of any work ... an adjustment, excluding profits, will be made ...."
When is the Contractor Entitled to An Equitable Adjustment Based on Costs ?
Most contracts entitle a contractor to an equitable adjustment under contract clauses or other legal theories for several causes including:
- Directed changes in the plans or specifications;
- Defects in the plans and specifications;
- Differing site conditions;
- Suspensions of work by the owner; or
- Improper terminations by the owner.
Delays to the contractor's critical path may also entitle the contractor to claim delay or impact damages, which may include "escalation in material costs." Thus, if a contractor can demonstrate that he was forced to incur rapidly escalating material costs due to compensable delays - usually delays caused by the owner -- he may be able to recoup some or all of those increased material costs.
When a breach by one party imposes a delay on the ability of the other party to perform its obligations under a contract, "the damages are to be measured by the direct cost of all labor and material ... plus fair and reasonable overhead expenses properly chargeable ... during the reasonable time required" to complete performance. Fairfax County Redevelopment and Housing Authority v. Worcester Bros. Co., Inc., 257 Va. 382, 514 S.E.2d 147 (1999).
In this time of rapidly escalating prices for steel and other metals, contractors should be particularly alert to situations entitling them to claim an equitable adjustment based on changed conditions.
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.