When inflation gets out of control

June 6, 2017

A case in Maryland serves as a warning against VEQ abuse

I am often confronted with claims involving Variation in Estimated Quantity, or VEQ, clauses.

VEQ clauses are quite typical in unit-price highway contracts and provide monetary relief to either the contractor or the highway department if actual quantities vary significantly from the estimated quantities. As the Maryland case, Genstar Stone Paving Products Co. v. State Highway Admin, 618 A.2d 256 (Md. App. 1993), illustrates, however, the VEQ clause is not an automatic invitation to renegotiate unit prices.

In July 1986, the Maryland State Highway Administration (MSHA) awarded a $5,951,622 contract for resurfacing an interstate highway. The contract was principally a unit-price contract and contained a VEQ provision, which provided as follows:

“Where the quantity of a pay item in this contract is an estimated quantity and where the actual quantity of such pay item varies more than twenty-five percent (25%) above or below the estimated quantity stated in this contract, an equitable adjustment in the contract price shall be made upon demand of either party. The equitable adjustment shall be based upon any increase or decrease in costs due solely to the variation above one hundred twenty-five percent (125%) or below seventy-five percent (75%) of the estimated quantity.”

One unit priced item in the contract was identified as Item 1006 for arrow boards, with an estimated quantity of 200 days. 

When the contractor was preparing its bid, it concluded that MSHA’s estimate was far too low and that the job would likely require 555 days rather than 200. Consequently, it inflated its price for Item 1006 and bid $900/day. The court’s opinion contains a convoluted description of the contractor’s testimony on how it arrived at $900, but suffice it to say, the price was much higher than the contractor’s anticipated daily costs.

As it turned out, the contractor was correct, and the actual quantity required for Item 1006 was 514. Since MSHA had received no other bids for this project, it reviewed historical bid results on other projects and determined that the average bid price for arrow boards was $55 per day. It, therefore, concluded that the contractor’s cost on this project likely did not exceed $55 and thus demanded a new bid price of $55 for the overrun quantity. MSHA also withheld $223,080 from payments otherwise due the contractor, which represented the difference between the bid price ($900) and the adjusted price ($55) for the overrun quantity of 256 days.

The Maryland Board of Contract Appeals ruled for the contractor, and MSHA appealed to the Circuit Court of Baltimore County, which reversed the decision. The contractor then appealed to the Court of Special Appeals of Maryland.

On appeal, MSHA argued that, in measuring any equitable adjustment under the VEQ clause, the proper approach is essentially to ignore the contract unit price with respect to the overrun quantity and pay only the contractor’s actual costs of providing those overrun units. The contractor countered that pursuant to the clear language of the VEQ clause, an adjustment is warranted only when a difference exists between the contractor’s cost to perform the overrun quantity and its costs to perform the estimated quantity.

The Court observed that this issue had not been litigated in Maryland courts in the past, but that a nearly identical federal VEQ clause had been the subject of litigation in federal tribunals. It thus followed the decision in Victory Construction Co., Inc. v. U.S., 510 F.2d 1379 (Ct. Cl. 1975) and held that contrary to MSHA’s argument, the proper standard is not whether the actual arrow board unit cost for the overrun quantity was less than the contract unit price, but whether the actual unit cost for this overrun units was less than the actual unit cost for the base (i.e., estimated) units.

The Victory decision, which, like Genstar Stone, also involved allegations that the contractor purposefully inflated prices, has been solidified by subsequent federal decisions and thus is enforceable under federal contracts. It is very unlikely a state court would rule differently absent allegations the contractor inflated its bid price either purposefully or inadvertently, because the language of typical VEQ clauses is pretty clear. However, if allegations of purposeful price inflation are involved, some courts might not agree with Genstar Stone. In the absence of other state precedent, contractors should point to Victory.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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