ConstructionPro Week, Volume: 3 - Issue: 12 - 03/21/2014

Should Owners Be Allowed to Delete Line Items of Work?

By Bruce Jervis

Some payment schedules are structured as line items of estimated quantities of unit-priced work. When pricing its bid, the contractor necessarily allocated project overhead and anticipated profit among the line items. The contractor will be paid for the actual quantities of work performed. But what happens if the project owner deletes entire line items of work?

In theory, the contractor should be fine if it allocated overhead and profit evenly among the unit prices. A reduced scope of work should reduce project overhead costs. And, a contractor cannot reasonably expect profit on unperformed work or unincurred costs.

In reality, however, it is difficult to allocate mark-ups evenly. Some project overhead costs continue despite a reduced scope of work. Some work items are more amenable to profit mark-ups than others. This leads to a question: Should project owners be allowed to delete entire line items of unit-priced work?

This question arose on a Delaware utility project. After a decision to perform some of the work with public forces, the owner deleted two significant line items. The contractor complained this caused it to incur uncompensated overhead and lost profit. A court ruled, however, that a broadly worded changes clause in the contract authorized such a deletion.

Is this reasonable? Companies bidding unit-priced work do not expect such a dramatic reconfiguration of the scope of work, boilerplate changes clauses notwithstanding. How can bidders price unit-priced work in a competitive fashion if they face elimination of entire line items of work? I welcome your comments.

COMMENTS

No question that fixed overhead costs are often independent of the quantity of work performed, and that it's generally inequitable to deduct a straight percentage of compensation for these costs along with the deleted work; however, the time to address this issue is in the negotiation of the contract, particularly the Changes clause. Sounds like the change clause in this case was 'broadly worded' for a reason.
Posted by: Michael Peters, RA Esq. - Friday, March 21, 2014 10:40 AM

England uses Quantum Surveyors to develope line item quantities for which bidders then apply unit costs inclusive of OH & P.

Project supervision/coord/CM? is a seperate fee based on time of project to complete vs total project cost.

Could this be where we are headed after CM-Multiple Prime?
Posted by: ADAguy - Friday, March 21, 2014 10:42 AM

Contractors routinely unbalance unit price bids to increase front-end income, take advantage of potential overruns, and limit exposure to underruns. The case in question could easily be one in which the contractor was caught by his own greed when the owner recognized unbalanced items and decided to perform that work with other forces.
Posted by: jch - Friday, March 21, 2014 11:20 AM

Experience leads me to believe that "reasonable" contract terms are desirable, but elusive. More often, individual parties on both sides are looking for advantage rather than equity. When the parties disagree, enforceability rather than reason is what counts, and "boilerplate" is not descriptive of any part of a construction contract.
Posted by: Eden Milroy AIA - Friday, March 21, 2014 11:30 AM

A traditional method for handling unit cost additions and deletions is to incorporate into the Changes provision an agreed formula that takes the variation in unabsorbed overhead, profit, administration, supervision, etc. into account.

By example:

Base contract unit rate (for bid quantities per issued contract documents): $1.00/unit

Additional units (added during construction): $1.10/unit.

Deleted units (removed from scope during construction): $0.90/unit.

As noted above, the time to address how unit costs are handled is during contract negotiations.

Standard contracts separately handle how fixed price or G-max line item scope costs are calculated when changed during construction, when omitted entirely, etc.
Posted by: howard i. littman, aia - Friday, March 21, 2014 12:03 PM

as much as negotiators on all sides try to shy away from rendering the most detailed breakdown of their pricing, precisely because their greed and effort to keep the upper hand, the only fair way to handle changes to the scope of work and/or price, is to agree beforehand, to use the most detailed possible information on how the bid price is composed, every time a change comes up. If that previous condition is not agreed, there'll be always a likely unfair or luckier beneficiary of the change, the one best positioned at the time and conditions the change happens.
Posted by: Francisco Pelaez - Friday, March 21, 2014 1:56 PM

The Contract should have a overall clause that

specifies the % cost of any deleted cots item

that the Contractor/P/M , still have to not only adjust a/several line items but also touch several trades before and after that " deleted item, and time to adjust and keep everyone in the loop is impacted. I suggest

a $ 250.00-500.00 Fee for any change weather its owner requested simply for Admin Cost.

Posted by: Kenneth Jones - Friday, March 21, 2014 3:48 PM

I always used to read post in news papers but now as I am a usr of internet thus from now I am using

net for content, thanks to web.
Posted by: Oaks - Monday, March 24, 2014 4:48 PM

This is a topic which iis close to my heart... Best wishes!

Where are your contact details though?
Posted by: Cain - Monday, March 24, 2014 5:03 PM