The Measure of Equitable Adjustments for Change Orders under Fixed-Price Contracts

• Author: Captain Gilbert J. Ginsburg
• Pages: 05

1. INTRODUCTION

   The changes clause of fixed-price supply contracts' currently

   The Contracting Omleer may at any time, by B written order, and with-aut notice to the Sureties. make changes, within the general scope of this contract , . , , If any snoh change mu8eg an inoreaie 07 deoreaar ~n the cost of, or the time required for the pe~fornanca ot any part of the work mder thin contract, whether changed or not changed by any such order, an equitable adiuslment shall be made in the contract price OT delivers schedule, 01 bath, and the contract shall he modified in writing aeeordingly , , . . (Emphasis added.)

   The changes clause of fixed-price construction contracts provided' until recently :3

   provides :

   The Contracting OReer may at any time. by a written order, and without notice to the iureties, make changes in the draningn andtor ~poelfieatians of this contract within the general scape thereof. Zi Such ohonam emm an incrcase 01 deorrme ,n the amount due under this contract,or in the time required for I& performance, an equitable adjustment ahall be made and the eontraet shall be modified in writing accordingly . . , .

   (Emphasis added.)

   The "equitable adjustment" referred to in bath clauses, taken literally, requires where appropriate an adjustment in contract price which is "equitable." Contracting officers, administrative boards, and the courts have been given the problem of interpreting the meaning of "equitable" through the determination of adjustments in particular cases.' It has been decided, for instance, that

   *The ~pinlans and Coneimions presented herein are those of the author and do not neeesssriiy represent the views of The Judge Advocate General's School or any other governmental agency.

   '* JAGC, U. S. Army; Member of the Faculty, The Judge Advocate Gen-ersi'a School, u. S. Army, Chariattesville, Virginia; A.B. (Law), 1956, University of Chicago: J.D., 1951, University of Chicago; Member of the Barn of Illinois and the U. S. Court of Military Appeals.

   'Standard Farm 32 (Oet. 1957 Edition), Article 2; Armed Services Pra-eurement Reg. 17-103.2 (clause dated Jan. 1958) (hereinafter cited BPASPR).

   "Standard Farm 23A (March 1953 Edition). Art>& 3.'The ciawe was changed by the Aprii 1961 Edition of Standard Farm %A, 41 C.F.R. g 1-17.401 (1861).

   an allowance for profit should be included in equitable adjust-ment8.J

   11. THE COST OR SUBJECTIVE MEASURE

   T'S.

   THE VALUE OR OBJECTIVE IIEASCRE

   In order to determine an equitable adjustment, It is necessary to determine the difference in the cost of performance of the work as changed by the change order and the work had the change order not been issude The problem is, whose cost of performance is meant? Should the difference be measured by comparing the actual costs (XThich the Government would be likely to pav on the open market) of a "reasonable contractor" or by measuring the difference in the actual (or anticipated) cost to the particular contractor with whom the Government holds the contract? The former measure constitutes the "value" or "objective" approach to measuring equitable adjustments, while the latter constitutes the "actual cost" or "subjective" approach.' In the majority of cases in which the amount of equitable adjustment is contested, the issue of which of the two approaches should be taken is not raised because in most cases there is no difference between the actual and reasonable costs af performance. It is only where there i8 a difference between actual and reasonable costs that the choice between the objective and subjective approach must be made. Such a difference occurs whenever the contractor has an advan. tage or disadvantage vis-8-vis the general public or the "market." Far instance, he or his subcontractor may make a mistake in a bid,' he may pay his supplier a price higher or lowere than the "market price," or he may perform more or Iess'O efficiently thm other contractors.

   " MacDanald Canslruclion Company, lSBCA No. 96 (March 29. 1950). See aiio G. M. Xanufacturing. Inc, ASBCA No. 2883 (Nou 7. 1957), 67--2 BCA '1606,e See Bruce Ca+sfruetlon Carp, ASBCA So, 5932 (Aug 30, 1960), 60-2 BCA '2797.

   . Cornyare E. 4. Piieiien Co Eng C & A Pia 406 (No". 12, 19531. vilh Dibr Production and Engineering Co., ASBCA 40.

   1138 iblarch 26, 1854). . Pi~elsen Y. United Stales, 141 Ct CI 793 (1958): The Lofsrrand Cam-pans, ASBCA No 4336 (Oct. 10. 1958). 5s-2 BCA '1962.

   E

   Bruce Cansrruclion Corp.. Eng BCA Pia 1359 (June 30, 19591, rrv'd on other o'ounds, ASBC.4 Pin 5932 (Aug. 30, 1960). 60-2 BCA '279:

   Dibs Production & Ensineeimg Company. ASBCA No. 1138 (March 26, 1951)

   MEASURE OF EQUITABLE ADJUSTMENTS

   111. THE CASES

   The Sialsen Case-The case most often cited by the proponents of the "value" or "objective" approach to the measure of equitable adjustments is the case of A'ielsen v. rnited States." That case invalved a contract for the construction of a building and utilities. The contractor (referred to herein as "N") bid a fixed amount for the utilities work, and he was awarded a lump sum contract for bath items. Ns bid for the outside utilities was based In Part On a sub-bid of $46,000 by a subcontractor, (referred to herein as "0") for the electrical work of which $22,564.32 was allocated to the outside electrical work on the alert hangar. The sub-bid, in turn, was based on a sub-sub-bid by a second-tier subcontractor (referred to herein as "A"), A's bid was in error and he refused to perform at his quoted price. A written subcontract was in effect between Nand 0, but there was no contract in effect between 0 and A requiring A to perform. The contract between N and 0 provided in part :

   . . . the terms and pi~vision~of [the cantracr between the Government

   and XI except as ~peeifleally modified by this Agreement, , , . are made a part of this Agreement; and further that [O] grants to [Xj those rights power% and remedm in every detail and respect and in the lame language and intent which [N and the Government] rewve to them-..I".P

   . . . .

   Subsequent to award of the contract to N, but before he began construction of the utilities, the Government issued a change order changing the outside electrical work on the alert hangar to a lesscostly type. Upon receiving the change order, 0 refused to perform the changed work and N contracted with a different subcontractor (referred to herein as "C") to perform the work as changed for 819,180. The Government claimed, as an equitable adjustment the decrease in "value" or in the reasonable cost of performance of the work, the sum of $41,510, as measured by the Eomrnment estimates of the cost of performance before and after the change. S contended that the meawre of the equitable adjustment should be the difference between his actual costs of performing the work before and after the change, ie., the difference between his eon-tract Price with 0 for the unchanged work and his contract price with C for the work 8s changed-the sum of $3,384 32. Subsequent offers of compromise by N were rejected by the Government and N appealed to the Corps of Engineers Board of Contract Appeal~'~

   (the "Engineers BCA"). That Board rendered a 2-1

   ~~

   '' 141 Ct. CI. 793 (1958).

   '* The re~re~enfativeof the Chid of Engineers to demdo diwvtes between

   Corps of Engineers construction mnir8ctori and eontrseting officers. The Bosrd i a i formerly referred to as the Corps of Engineers Claims and Appeals Board.

   decision in favor of the Go~ernment.'~

   The Board cited with approval the objective approach and punctuated the opinion with phrases such as "reasonable cost," "what it would have cost," "value," and "reasonable value."

   The dissenting Board member noted that the subcontract between 0 and N bound 0 ta the terms of the changes article in the prime contract. N presumably could have required 0 to perform the work as changed, with a commensurate equitable adjustment, computed in accordance with the changes article. Instead, S released 0 from his subcontract.

   S appealed the decision to the Armed Services Board of Contract Appeals" (the "ASBCA") which sustained the Engineers Board of Contract Appeals by a 12-4 decision.'j The majority noted that the method of arriving at an equitable adjustment utilized by the contracting officer was that of comparing the reasonable cost of performing the work before and after the change, found the method to be "basically sound" and found "no fault with it or its application in the instant case." Further, the Government did not have actual or constructive knowledge of the amounts allocated by S to the various portions of the work eom-posing his bid and the Government was not on notice of the mistake in his bid. A dissenting opinion ws.8 not filed by the minority.

   N then brought suit in the Court of Claims.'e That court dismissed N's petition far relief, noting that his claim for the difference between his anticipated actual costs before and actual casta after the change was only another way of seeking reformation of the contract an account of his unilateral mistake."

   It should be noted that while the Engineers BCA adopted the objective approach in reaching its decision in Nielsen, the ASBCA merely found ''no fault with it or its application in the instance case,"13 Thus, while the Engineers BCA decision in Sielsen constitutes a precedent for the objective approach, the ASBCA apinion may well be limited in application to the facts of the case before it, and at best it constitutes a doubtful precedent for broad

   Appeal of E. U. Slelien Company, Eng. C &I

   KO 408 (Sov. 12, 19531.

   The reprenentatwe of the Secretary of the Army to decide disputes onappeal from dsemians of contracting officers and intermediate boards ASPR,

   Company, ASBCA KO.

   1990 iOct. 1. 1964).on to render Judgment upon a claim agalnii the tho Can%titutm,

   B ststnfe, 01 executive regulstian. a contract. or damages not sounding ~n tort. 28 U S.C E 1491 (1958)

   Nielien V. United States. 141 Ct Cl...