LEGAL BY GERARD W. ITTIG
That comment may be a little cynical, but it reflects the fact that estimators
make assumptions, and sometimes errors,
in preparing a bid. Some companies keep
records to reflect historic pricing, for
example, on labor productivity. They may
also consider the circumstances of the
project, among them, the current volume
of their work, their overall profitability,
their desire to get into a new market, their
knowledge of local labor conditions and
the potential for price escalations.
After the budget is prepared, the contractor may make an informed judgment
of a “sell price,” increasing or decreasing
the lump sum price to account for home
office overhead and profit. The pricing of
change orders does not necessarily follow the same estimating pattern.
There has been substantial litigation over
the proper method for pricing deductive
modifications. The standard, at least in
federal government contracting, is “
reasonable value.” Generally, whatever
price the contractor used in its bid for
the deleted item or deleted work scope,
the deduct will be the cost the contractor
would have incurred if the deleted work
had been performed.
The courts are concerned that a
contractor’s position not be improved
by a deductive modification. If the contractor underbid an item or mistakenly
omitted an item entirely, the argument
is that the contractor should not be
relieved of that error because the owner
deleted the item.
In one case, an electrical contractor
had budgeted $34,800 for underground
duct and cable, and the owner ordered
this work changed to overhead cable.
The government estimated the deleted
underground work at $60,800, and
that figure was held to be reasonable.
The contractor was not allowed to use
its lower figure and thereby reform its
This “would have cost” standard for
deductions has some parameters that
are worth noting. The primary consideration is the contractor’s cost, not the
industry’s “reasonable value.” For the
same reasons that bids differ among
competitors, even without mistakes,
some contractors are more efficient or
have greater buying power than others.
If you can show that the deduction,
as applied to you, should be lower than
someone else’s estimate, you should prevail. For that reason, the courts do not
like to use prices from industry manuals.
Deletion of a “severable” line item
There are contracts where the owner
demands separate pricing for discrete bid
items. With some of these contracts, the
owner reserves the right to award those
bid items separately. In that case, there is
a danger for the contractor if it submits an
unbalanced bid—the owner may award
only the lower priced line items.
When an owner later decides (after
award) to deduct or delete an entire severable bid item, the value placed by the
contractor on that item will control regardless of the “would have cost” standard.
In Gregory & Reilly Associates Inc.,
the Federal Aviation Agency issued a contract that had four discrete phases, with
a price for each. The deletion of one of
the phases resulted in a reduction in price
equal to the stipulated amount regardless
of the “would have cost” amount.
Keep in mind that a line item in a
schedule of values is not necessarily a
severable item. The schedule of values
is principally to be used for billing and is
not an agreement between the parties of
the true value of the line items.
Many contracts contain a “termination
for convenience” clause that permits the
owner to terminate the contract in whole
or in part. The question then becomes
whether a reduction in scope of work
caused by a deductive modification should
be treated as a change order or as a partial
termination. Determining which of these
two concepts applies can translate into a
major difference in the deductive price.
A change or a partial termination?
In a recent case, a contractor had completed the major portion of its contract
when the owner decided to cancel the
remaining work. The contracting parties presented two very different pricing
methods. The contractor wanted to
keep what it had been paid, based on
approved percent completion, and
offered the remaining percentage as the
deduct. The owner wanted to evaluate
the uncompleted work on the basis of
what it should have cost the contractor.
The difference between the two methods
Deductive change orders vs. partial terminations
was significant. The court had to decide
whether the pricing should be valued IST
What Do You Call It
When It’s Gone?
HAVE YOU HEARD THE DEFINITION OF ESTIMATING? It is the art of starting
from a random point and then proceeding with great accuracy.