Volume: 16, Issue: 1 - 01/15/2018
When actual quantities of unit-priced work vary from the contractual estimated quantities, there is a cost impact on the contractor. A quantity underrun may limit the contractor’s recovery of fixed costs, reducing or eliminating any profit on the work. Conversely, a quantity overrun reduces the fixed costs per unit and may provide the contractor with a windfall on the quantity increase.
Quantity variation clauses are intended to reduce these contingencies and encourage tight bid pricing, protecting contractors against underruns and project owners against overruns. The prototypical clause is the federal Variation in Estimated Quantity clause. To the extent an actual quantity varies from an estimated quantity by more than 15%, the unit price will be adjusted, upward or downward, to reflect the cost impact of the quality underrun or overrun. Read more.
The Variation in Estimated Quantity clause applies only to quantity variations that were not reasonably predictable at the time of contract formation. It does not limit government liability for negligently prepared quantity estimates by forcing the contractor to bear the first 15% of the burden of the government’s negligence.
A contractor controlled the activities of its on-site laborers and deducted their costs on its federal tax return. The contractor could not pretend the workers were the employees of subcontractors and not employees of the contractor itself.
Volume: 15, Issue: 25 - 12/29/2017
“Pay-if-Paid” clauses in subcontracts are controversial. They shift the risk of project owner nonpayment from the prime contractor to the subcontractor. Subs contend this is unfair. They do business with the contractor. They have no agreement, and little leverage, with the project owner.
Some state supreme courts have ruled the clauses a violation of public policy, primarily because they compromise subcontractors’ mechanic’s lien and public works payment bond rights. Some state legislatures have declared them void and unenforceable, yet a majority of the states still enforce the clauses.
The Kentucky Supreme Court recently addressed the matter for the first time. The clause in question was unambiguous. It said payment by the project owner to the contractor was a condition precedent to the contractor’s obligation to pay the sub. And, the subcontractor acknowledged it was relying on the credit of the owner, not the credit of the contractor. Read more.
The government breached a contract by withholding superior knowledge, but the impact of the breach was not material. The government was entitled to assess liquidated damages for late completion notwithstanding the prior breach.
The Kentucky Supreme Court, in a case of first impression, has ruled that an unambiguous “pay-if-paid” clause in a subcontract was enforceable. Any public policy concerns were outweighed by the freedom to contractually allocate foreseeable risk among parties to a transaction.
Volume: 15, Issue: 24 - 12/15/2017
It is standard counsel that for changed work or changed contract terms, contractors should rely only on written change orders executed by the project owner’s duly authorized representative. Anything less puts the contractor at risk.
In the field, however, it is difficult to meet this standard. Time constraints and the need to coordinate multiple parties pose a daunting challenge. Parties adopt a less formal approach to changes – not because of inherently sloppy business practices – but because of the practical needs of the project. On private projects, field approval by the owner's representative is often sufficient. Not necessarily so on public projects. Read more.
A public works contract did not allow the project manager to issue change orders extending the performance period. Only the county board of commissioners could authorize change orders, although the county manager, under extraordinary circumstances, could approve continuation of work pending authorization. This was defined to include delay to the schedule’s critical path.
The Armed Services Board of Contract Appeals has addressed, in a termination for convenience of the government setting, the recovery of the contractor’s termination settlement expenses. The administrative time of company executives was compensable, as were severance payments to employees and fees paid to outside legal counsel.
Volume: 15, Issue: 23 - 11/30/2017
Progressive property damage caused by defective construction is a challenge. By the time the problem is discovered, the project has been completed and is being utilized. The various contractors are long gone from the site. The nature and extent of the problem may not be self-evident. And, responsibility for the problem will almost surely be hotly contested. Read more.