May 06, 2014

Contracts based on unit prices typically contain provisions for adjustment of those prices if actual quantities differ substantially from those estimated. These so-called “variations in quantities” clauses afford some measure of protection to both the contractor and the owner if quantity estimates are off and the actual costs incurred are either higher or lower than anticipated. It is important that the parties to the contract understand and follow the procedures set forth in such provisions or they may not be able to enjoy that protection. Pavers, Inc. v. Board of Regents of the University of Nebraska, 276 Neb. 559, 755 N.W.2d 400 (2008), provides a cautionary tale of what can happen if such a contractual procedure is not followed.

Factual Background

Pavers, Inc. (“Pavers”) contracted with the University of Nebraska (the “University”) to perform earthwork for a student housing project. The contract divided the work into several separate activities all of them paid on a unit price basis. The University’s bid form for the project had specified an estimated quantity for each separate activity and Pavers bid the project based on those estimated quantities.

Substantial overruns on the project were experienced for three of the activities: soil removal, seepage water removal, and seepage water disposal. Pavers notified the University of the overruns. The University was also independently aware of the overruns. Nevertheless, the University instructed Pavers to proceed with the work without first requiring a change order or issuing a construction change directive.

After the project was completed, Pavers sought payment for the actual quantities of work performed based on the unit prices in the contract. The University contended that, because of the overruns, the unit prices should be equitably adjusted. The University then unilaterally adjusted these unit prices and paid Pavers an amount it claimed was fair and equitable for the work performed. But the amount the University paid to Pavers for activities that experienced the overruns was not only far less than the amount Pavers contended it was entitled to based on the unit prices, it was also far less than the actual costs incurred by Pavers in performing that work. So, Pavers filed suit alleging breach of contract.

The trial court concluded that neither awarding Pavers its full unit price nor requiring Pavers to bear the increased costs of the work would be equitable. The court did not determine what would have been an equitable adjustment to the unit prices because it found both that the University had failed to meet its burden for the equitable adjustment it sought and that Pavers’ exact losses and increased expenses were difficult to determine “because expenses were not tracked on a per work unit basis.” Instead, the trial court reasoned that a total cost method should be applied and awarded Pavers its total costs incurred on the project less the amount paid by the University. Both parties appealed.

Opinion of the Supreme Court of Nebraska

The Supreme Court of Nebraska stated that the issue was whether the unit prices should be reduced because of the large increases in the quantities. The University argued that the applicable section of the contract’s general conditions required an equitable adjustment to the unit prices. The specific contract provision stated:

If unit prices are stated in the Contract Documents or subsequently agreed upon, and if quantities originally contemplated are so changed in a proposed Change Order or Construction Change Directive that application of such unit prices to quantities of Work proposed will cause substantial inequity to the Owner or Contractor, the applicable unit prices shall be equitably adjusted.

The court rejected the University’s argument. Instead, the court held that before the work was completed the University could have sought relief under the contract by change order or construction change directive once itdetermined that it had greatly underestimated the quantities, and before the additional quantities of work were performed.  The court noted, the contract specifically allowed the University to seek an equitable adjustment while the work was being performed. If the parties could not agree on the unit price to be charged, the contract allowed the University to issue “Construction Change Directives” to change the work and propose a basis for adjustment of the contract sum. In this regard, the contract stated:

The Owner may by Construction Change Directive, without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted accordingly.

A Construction Change Directive shall be used in the absence of total agreement on the terms of a Change Order.

If the Contractor does not respond promptly or disagrees with the method for adjustment in the Contract Sum, the method and the adjustment shall be determined by the Architect on the basis of reasonable expenditures … including, in case of an increase in the Contract Sum, a reasonable allowance for overhead and profit.

The contract did not, however, permit the University “to unilaterally reduce the unit prices in the contract after the work had been performed.” The court thus held that Pavers should be paid for quantities of work performed based upon the contract unit prices.

The court concluded its opinion by stating that it was not the province of the trial court to rewrite the contract or adjust it based upon what the court considered to be fair.  Instead, it was required to enforce the contract between the parties. Under the contract at issue in this case, the Supreme Court of Nebraska found that, it was “incumbent upon the University to seek an adjustment of the unit prices before the work was completed or sustain its burden of proof regarding an equitable adjustment to the unit prices.” The University failed to do either and thus there was no basis to award Pavers anything other than the unit prices.

Comment

This case illustrates the importance of understanding contract provisions covering extra work, quantity changes, and payment, and the dangers of deviating from them. In this case, the University knew large quantity overruns were being encountered and apparently (based upon testimony given at trial by its project manager) anticipated that the unit prices would be adjusted after the project was over. The contract expressly permitted adjustment of those unit prices; however, it did so by means of a specific procedure. The University failed to follow that procedure.  As a result, the University was unable to obtain a unit price adjustment to which it may well have been entitled had it simply followed its contract.

Andrew R. McBride
404/582-8063
[email protected]
Member of the State Bars of Georgia and New Jersey