By Bruce Jervis
The concept of an “equitable price adjustment,” which originated in federal construction contract documents, permeates construction contracting. In the event of a change in the scope or definition of the work, the contractor will be entitled to an equitable adjustment of the fixed contract price. There is a problem, however. The calculation of this price adjustment is not defined.
The textbook definition of an equitable price adjustment is one that makes the contractor whole. The contractor is left in the same net financial position it would be in without the change. This definition can be difficult to apply in the real world. Consequently, construction contracts sometimes stipulate a formula for pricing changed work; for instance, documented direct costs plus percentage mark-ups for indirect overhead and profit. More often than not, however, owners and contractors are left grappling with an “equitable” adjustment.
In a recent Idaho case, a construction management agreement called for an equitable adjustment of the CM’s fixed fee in the event of project expansion. The original fee was based on 4.7 percent of the construction budget. An early amendment to the agreement increased the fee by 4.7 percent of the increased construction costs. This made it easy for the court when entitlement to an additional fee was litigated. Given the course of dealing between the parties, 4.7 percent of construction cost was clearly equitable.
Unfortunately, this result was reached after years of costly litigation (the CM was awarded $1.2 million in attorney fees). Would it not have been simpler to stipulate an adjustment to the fixed CM fee of 4.7 percent of construction costs? Does it make sense to use the amorphous standard of an “equitable adjustment” when a numeric formula can be stated? I welcome your comments.