Because most state highway departments assume the risk of fuel-cost escalation and include price-adjustment clauses in their contracts, contractors generally feel no financial effects by varying fuel prices. These clauses, however, are not always clear, and as a case in Mississippi demonstrates, disputes sometimes arise concerning how adjustments are calculated.

The case involved a contract to construct 6.25 miles of highway for the Mississippi Department of Transportation (MDOT). The contract included a fuel-adjustment clause that established a base fuel price upon which all bidders were to base their bids. Adjustments would be made on each pay estimate based upon variances between the base price and a specified index that MDOT publishes each month. The last sentence of the clause addressed adjustments for work performed after the contract completion date as follows: “After expiration of the contract time, including all extensions, adjustments will be computed using fuel and material prices that are in effect at the expiration of the contract time.”

Once the contractor exceeded the adjusted contract completion date, MDOT began making fuel adjustments in accordance with its interpretation of the provision, which was to essentially freeze the monthly index price in effect as of contract completion date, and all payments thereafter were made based upon the difference between the original baseline price and the “frozen” index price.

The contractor did not object, because for many months thereafter, fuel prices were fairly stable. However, when Katrina struck in August 2005, prices skyrocketed and MDOT continued making adjustments based upon the relatively small variance between the original baseline price and the frozen index price. From this point, the contractor lost nearly $500,000 and, consequently, it filed a claim, which MDOT denied. The contractor sued.

Price check

The contractor argued that the adjustment clause merely requires MDOT to reset the original baseline price to the index price current as of the contract completion date, and each subsequent monthly adjustment should be based upon the difference between the revised baseline and the current index price. It also argued that if the department’s interpretation is a correct one, the clause violates the state statute that grants the department the authority to include fuel-price adjustment clauses in its contracts.

The trial court rejected both arguments, and the contractor appealed to the Supreme Court of Mississippi. Like the trial court, the Mississippi Supreme Court agreed with MDOT’s interpretation. However, it agreed with the contractor’s contention that the clause exceeds the statutory authority granted MDOT to include such clauses in its contracts, and it remanded the case back to the trial court for a full trial.

The court focused on the requirement in the statute that adjustments must be made “with relation to the cost to the contractor” and ruled that by freezing the monthly index for payments after the contract completion date, subsequent adjustments were arbitrary and thus no longer took the contractor’s cost into account.

Although this outcome is a rare one, it highlights the importance of procurement-related statutes in public contracts. Public contracts must always be read in concert with enabling legislation. Certain procurement statutes provide additional terms that are regarded as part of the contract. Other statutes expand on the meaning of written public contract terms. Lastly, and as demonstrated in Mississippi in this case, statutes can actually take precedence over written contract terms and even invalidate them, especially if they are written contrary to a particular statute. Therefore, to fully understand their contracts, the public contractor must familiarize themselves with the procurement statutes in the states in which they work.