In my column last month, I wrote about unbalanced bids. Interestingly, that same subject was addressed in a recent New Jersey case, M.J. Paquet Inc. v. New Jersey Department of Transportation, 335 N.J.Super. 130, 761 A.2d 122 (2000).
In October 1992, NJDOT solicited bids for a contract to rehabilitate several highways, including restoration of 12 bridge structures. Paquet prepared the 44 items pertaining to painting the bridges utilizing an estimate it received a few days before the bid. However, shortly before submitting its bid, Paquet received a much lower estimate from another subcontractor. Paquet did not reduce its bid for those items. Instead it lowered the price of other pay items, thus reducing and unbalancing its bid.
Paquet submitted the low bid. The department was not aware that the pay items contained in Paquet?s bid were unbalanced. However, after Paquet was awarded the contract it submitted the O.J. Painting subcontract to the department for its approval. The bridge painting items in Paquet?s bid totaled $826,473.50, while O.J. Painting?s subcontract totaled $450,414.
Approximately 11 months later, the Occupational Safety and Health Administration revised its rules regarding the removal of lead-based paint. NJDOT and Paquet were unable to reach an agreement on the price of the new work. As a result, under the "Extra Work" provision in the standard specifications, NJDOT solicited new bids and deleted the bridge painting work from its contract. NJDOT issued a change order eliminating the bridge painting work and reducing the contract price by the unit price for each of the bid items.
Paquet brought suit for breach of contract and unjust enrichment. The trial judge ruled that NJDOT properly exercised its right to delete the bridge painting work from the contract because the parties could not agree on a price adjustment for the extra work. The judge nevertheless awarded Paquet $325,000, finding that in adjusting the contract price it was improper for the DOT merely to deduct the total of the pay items attributable to the bridge painting work. While acknowledging that Paquet?s bid was unbalanced, the judge concluded that reduction based on unit prices did not accurately reflect the cost and overhead Paquet saved by not having to perform that portion of the contract.
Go with what?s written
The question before the court was how to "fairly" adjust the contract price in cases where work is deleted. NJDOT argued that the fairest approach was to use the unit prices, and that had the unit prices been too low it would have been bound by those prices. Paquet asserted that the deduction should be based on the cost, overhead and anticipated profit that would have been expended or realized had the contract been fully performed in accordance with its original terms. In its decision, the court reviewed many cases dealing with "unbalanced bids."
In a previous case, the court stated: "[a]n unbalanced bid comprehends [one] based on nominal prices for some work and enhanced prices for other work." In another case, the court found "perfectly proper" the practice by which a contractor "bid[s] low on an item that [he] thinks will underrun the quantities listed in the proposal form" and "make[s] a high bid on something that is likely to overrun the stated quantity."
The court then turned to Section 102.8 of the NJDOT Standard Specifications. It provides that a contractor cannot recover additional compensation arising from the bid on an item, or group of items, inaccurately reflecting the cost of such work or containing a disproportionate share of the bidder?s anticipated profit, overhead and other costs. The court stated that this provision and others are clearly designed to bar bidders from submitting unbalanced bids. An essential premise of the contract entered into between NJDOT and Paquet was that the bid prices of the pay items specified in the bid were accurate. Among other things, they were used by the parties in determining the amount of progress payments as they came due.
The court recognized that the federal courts had taken a different approach construing the equitable adjustment requirements in instances where the government makes changes in the scope of work. The phrase "equitable adjustment" is a legal term of art. It signifies a principle designed "to keep a contractor whole when the government modifies a contract." The equitable adjustment rule incorporates the principle that the proper measure in recalculating the contract price is "the difference between what it would have cost to perform the work as originally required and what it cost to perform the work as changed."
The court distinguished the federal cases because of Section 102.08. That section expressly prohibits unbalanced bids and mandates that contractors accurately reflect the cost, overhead and anticipated profit attributable to the particular portion of work to be performed in their unit prices. The court merely decided it should hold the parties to the bargain they had reached and enforce the contract as written.
I believe the court was influenced because the bid was admittedly unbalanced contrary to Section 102.08. I wonder what NJDOT would have done had it added work. Would it have paid the higher unit price?