Variation in Estimated Quantity (VEQ) clauses appear in most public-highway construction contracts because they are mandated by law when federal funding is involved.
Because they have become part of state highway departments’ (SHA) standard specifications, such clauses generally apply to state-funded projects as well.
VEQ clauses protect the contractor from the financial risk of significant under-runs or over-runs in estimated quantities by allowing unit-price adjustments. The most common application of the VEQ clause is in an under-run scenario where reduced economies of scale increase the contractor’s costs. However, a contractor’s cost also can increase when estimated quantities over-run. Although rarely resorted to, VEQ clauses also allow the SHA to demand a price reduction if altered quantities reduce the contractor’s costs.
Many VEQ clauses distinguish “minor” items from “major” items and either limit price adjustments to major items only or specify that the percentage change in quantity must be significantly higher to warrant a price change for minor items. For major items, a price change is typically not allowed until quantities are altered by greater than 25%. Furthermore, the renegotiated price usually applies only to quantities above the 25% threshold. In the case of under-runs, contractors cannot recover lost profits on work not performed. Thus, although VEQ clauses appear favorable to contractors, their limitations provide more protection to SHAs than to contractors. For this reason, contractors sometimes seek ways to avoid application of the VEQ clause.
This was the case in M. Matt Durand, LLC v. Louisiana Department of Transportation and Development, No. 2010 CA 0625, 2010 La. App. LEXIS 756 (La. App. 1 Cir. Dec. 22, 2010), which involved a Louisiana Department of Transportation and Development (LA DOTD) project for embankment and shoulder repairs to a roadway eroded during Hurricane Rita. The initial bid requirements called for installation of 140,125 cu yd of limestone material over a 10-mile stretch of roadway. LA DOTD’s calculations turned out to be highly erroneous, as the subcontractor performing the work ultimately placed only 40,854 cu yd of material over approximately 30 miles of roadway. LA DOTD acknowledged the substantial under-run, but because the parties could not agree on a price, the subcontractor filed suit against the department through the prime contractor.
At trial, the subcontractor argued that the department materially breached the contract by refusing to issue a change order and, therefore, the department could not rely on the VEQ clause to limit the subcontractor’s recovery. The subcontractor thus argued that it was entitled to breach-of-contract damages, which, it contended, included compensation of $5,237,969.85 for unused aggregate. The subcontractor testified at trial that it had purchased the aggregate early on, and its offer to deliver the material to the department was refused. In the alternative, the subcontractor argued that it was entitled to lost overhead and profit on the unused aggregate, which totaled $2,128,187.14. The trial court sided with LA DOTD and awarded the subcontractor costs calculated in accordance with the VEQ clause. The subcontractor appealed—and won.
The subcontractor’s approach in this case—arguing that a material breach by the department prevents it from relying upon terms of the contract—is not a new one. Indeed, this is the law in most states. However, in practice, courts are reticent to resort to common-law breach-of-contract damages where a specific contract term prescribes the manner in which one party is to be compensated under particular circumstances. The outcome may have been different if, despite the disagreement over re-pricing, the department had issued a unilateral change order. Nevertheless, the Durand decision serves as a reminder that materially breaching a contract can have costly consequences.