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ConstructionPro Week, Volume: 5 - Issue: 43 - 11/04/2016

How Is a Deductive Credit Priced?

By Bruce Jervis

 

When a project owner directs a reduction in the scope of work, the owner is entitled to an equitable reduction in the fixed contract price. This is reasonable – if there is less construction work to perform, there should be less compensation. The difficulty is calculating the amount of the reduction, or credit.

 

The proper measure of a deductive change order credit is the actual cost savings realized by the contractor as a result of the reduced scope of work. The project owner is not entitled to re-price the contract based on the cost of performing the remaining work. And, a credit is a claim asserted by the owner against the contractor, so the owner has the burden of proof.

 

These principles were applied recently when a contractor failed to provide any documentation of the cost savings it realized when the scope of work was reduced. The project owner estimated the cost of performing the reduced scope and priced the deductive change order accordingly. This was an error. The owner could have estimated the cost of performing the deleted work, but the owner was not entitled to re-price the contract. The owner failed to meet its burden of proof. The contractor was entitled to recover the full fixed contract price in spite of the reduced scope of work.

 

At first glance, this appears unfair to the project owner. The contractor was the party that knew its actual cost savings, yet refused to provide that information. But the owner could have estimated the cost savings and met its burden of proof in that manner. Again, a deductive credit is a claim asserted by the owner and the owner is not entitled to re-price a fixed-price contract. Your comments are welcomed.

 

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