LAW: THE CONTRACTOR'S SIDE: Measured in units

VEQ clause prevails in Foley case

Blog Entry May 04, 2012

Larry Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction.

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Heavy-highway contractors accustomed to unit-priced contracts are typically familiar with the Variation in Estimated Quantities (VEQ) clause.

The VEQ clause exists for the benefit of both contracting parties and provides an avenue of relief for either—in the form of adjusted unit prices—if quantities vary from those specified in the contract. Thus, the VEQ clause establishes quantities as a fundamental assumption of the contract, and neither party bears the risk of significant increases or decreases.

The three main points to take away from the VEQ clause are (1) either party may seek a price adjustment; (2) the right to a price adjustment arises only after the contractor performs 15% more or 15% less than the original contract quantity; and (3) a price adjustment is appropriate only if the contractor’s costs have changed as a sole result of the variation in quantities.  

Owners rarely avail themselves of the VEQ clause, but it is not totally unheard of, and the case of Foley Co. v. U.S., 11 F.3d 1032 (C.A. Fed. 1993) involved such an occasion. Foley involved a government contract for closure of four hazardous waste lagoons at a U.S. Army ammunition plant. The contract specified a quantity of 6,600 tons of sludge removal, which the contractor agreed to perform at a price of $308 per ton. When the contractor began overrunning the contract quantity, the government unilaterally adjusted the unit price downward. For the first 7,590 tons, which represented 115% of the original contract quantity, the government paid the full unit price of $308. For the remaining 16,347.51 tons of sludge, the government paid only $295 per ton. The contractor filed a claim with the government seeking $212,517.63, which represented the difference between the original contract price and the reduced price the government paid for the quantity above 115%.  

Unfortunately for the contractor, the contracting officer apparently believed the government had been too generous and further adjusted the unit price from $295 to $237. This new price was based upon the contractor’s actual costs of performing the quantities over 115% of the original quantity, plus a reasonable markup. The contracting officer thus demanded from the contractor a refund of more than $773,000. The contractor appealed and sought the full unit price of $308 for all sludge removed.

When the government conceded before the Federal Court of Claims that it could not prove the contractor’s costs for performing the work in excess of 115% of the original quantity actually decreased, the court entered judgment for the contractor. The government appealed to the United States Court of Appeals for the Federal Circuit.

In its appeal, the government argued that the lower court improperly interpreted the term “any increase or decrease in costs due solely to the variation” as requiring a change in the contractor’s cost before an adjustment is appropriate. The government contended that the language simply informs the parties that the adjustment can be based only upon the portion of work in excess of 115% or below 85% and it argued that it could limit the contractor to its actual cost plus a markup on quantities above 115%—regardless of whether the contractor experienced any change in cost.

The Court of Appeals disagreed and, pursuant to a long line of decisions involving the VEQ clause, held that only where a contractor’s costs of performing the greater or lesser quantity of work increases or decreases can a party demand a change in the contract unit price.  

Although this decision went against the government, it highlights the need for the contractor seeking a unit-price adjustment under the VEQ clause to be prepared to demonstrate the difference between costs it would have incurred to perform the specified quantity and its actual costs and to prove that the change in cost resulted solely from the quantity variance. R&B

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