ConstructionPro Week, Volume: 2 - Issue: 17 - 04/26/2013

Does the Concept of an ‘Equitable Price Adjustment’ Make Sense?

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.

 

COMMENTS

Thanks for the information. I am working for a overseas based Design Build Firm, who are active on a number of U.S. Government contracts. Now all I need to do is get this translated into Albanian and Serbian.

Cheers
Posted by: Tim - Friday, April 26, 2013 10:14 AM


A fee calculation based on a percentage of the final construction cost does not yield a fair and equitable price adjustment for the value of the Architect or CM's work in the case of changes that do not increase construction cost. Two examples from my experience: 1) The owner who changes their mind about carpet color after the carpet is delivered. This does not increase the overall construction cost, but does cause extra hours of work for the Architect or CM, and probably causes re-stocking and new delivery charges. 2) The owner who commissions a 20-story building and only after ground-breaking discovers they only have the funds to build 16 stories. Here the final cost of the building is decreased, but the change causes extra work, and probably overtime, for the entire design team, as they race to revise the design for a building that is under construction. In both of these cases a fair and equitable price adjustment for the services of the Architect or CM would have to be calculated on some basis other than a percentage of the overall final cost of the building.
Posted by: Gary Olmon, Architect - Friday, April 26, 2013 11:56 AM


The cases mentioned of price decrease are good examples that Equitable Price Adjustment should not be based on percentage of construction cost. Also in Design Build contracts, there could be some conflict of interest or the perception thereof in relating Equitable Price Adjustment to construction cost. I think it would be best to calculate Equitable Price Adjustment due to any changes using time and material by using previously agreed upon rates.
Posted by: Ashraf Habbak - Friday, April 26, 2013 12:41 PM


My experience is that the key is being stated or negotiated up front. This can be a delicate situation.For fixed-fee contracts, a reduction in scope does not lessen the fees, and in fact often creates extra work for the design/production teams. The one example above about "carpet being changed after delivery" does indeed cause extra work/cost! Delivery, unloading, reloading, restocking (fees), plus schedule costs all suffer with a change like this! Additional scope should always be negotiated with the additional fees included.
Posted by: John - Friday, April 26, 2013 1:50 PM


What’s wrong with a T&M contract for changes? I have used this method and liked it. It should be agreed to up front.
Posted by: Samuel Waits - Friday, April 26, 2013 7:36 PM


Each case is different and no set formula will always work to satisfy all parties involved as equitable price adjustment.
Posted by: Dragan - Wednesday, May 8, 2013 6:31 PM


Each case is different and no set formula will always work to satisfy all parties involved as equitable price adjustment.
Posted by: Dragan - Wednesday, May 8, 2013 6:31 PM


I m currently working on a project here in zambia were there is a clause for price Adjustment with the following fomular given in the contract document:-Pc=Ac+Bc Imc/Ioc where the Non adjustable coefficient Ac is 20% and the Adjustsble coefficient Bc is 80%.

now my question is how do you understand the 20 and 80% coefficients. can you explain to me. does the 20% coefficient related to the percentage of the Advance payment

rgds

L.Mbewe
Posted by: Lyford Mbewe - Saturday, June 1, 2013 9:20 AM


 









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