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01/15/2018

Editor’s Notes

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.


The structure of a quantity variation clause gives rise to an interesting question. What if the quantity estimate, from which any variation is calculated, was fundamentally flawed? Does the project owner, who is contractually responsible for the reasonableness of the estimate, get a free pass on the first 15% of a quantity underrun?


This question was recently answered in the negative. A quantity variation clause applies only to variations that were not reasonably predictable at the time of contract formation. The clause is not intended to require the contractor to bear the first 15% of the burden of the owner’s negligence. The contractor may recover the full cost impact of the quantity underrun.


The other case in this issue involved the employee/subcontractor distinction. A contractor controlled the activities of its on-site laborers and deducted some of their costs on its federal tax return. The contractor could not pretend the workers were employed by alleged subcontractors instead of the contractor itself.
 

 

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