Problematic Construction Contract Clauses: Variation in Quantity

This is the fifth blog post in a series that discusses clauses in construction contracts with the goal of providing awareness of contract terms that often cause difficulties and give rise to claims.

Previous blog posts have addressed problematic contract clauses involving differing site conditions, no damages for delay, changes, coordination, suspension of work, and warranty and defects liability. This post discusses variation in quantity clauses, and other posts will discuss the following clauses:

• Inspection
• Force majeure
• Flow down
• Compensation and payment
• Weather
• Escalation
• Oral modifications

Variation in Quantity
Variation in quantity clauses establish terms for determining costs when quantities cannot be reasonably estimated and there is substantial risk that wide variations could result in excessive losses or windfall profits. A unit price adjustment in the contract is often used if quantities vary by more than a certain percentage.

An example unit rate schedule provides the following:

5.3.4    Within 60 days of Contract Award, Contractor shall make an independent estimate of the quantities it anticipates will be required to complete the Work and shall develop and provide to the Owner an initial material takeoff estimate listing all such quantities. If the quantities in the Contractor’s initial material takeoff estimate are greater than the estimated quantities provided by the Owner in the Unit Rate Schedule (such increase to be determined at the craft level and not at the individual commodity or single line item level, as provided in paragraph 5.3.6 below) by 25% or more and such increase will cause critical path delay to the Scheduled Mechanical Completion Date, Contractor shall so notify the Owner before the expiration of such 60 day period and, upon demonstrating to the Owner’s reasonable satisfaction the legitimacy of the quantity increase and the impact on the critical path schedule, the parties will negotiate an appropriate adjustment to the Scheduled Mechanical Completion Date.

Failure of the Contractor to provide notice to the Owner of the quantity increase and the anticipated impact on the critical path schedule within the period stated herein shall constitute a waiver of Contractor’s right to a time extension due to quantity increases, unless such quantity growth is caused by a subsequent Owner-directed change.

5.3.5    At the time engineering is sufficiently complete to enable Contractor to make a reasonably accurate determination of the quantities it anticipates will be required to complete the Work, but in no event later than issuance of Approved For Construction Drawings, Contractor shall make such determination and shall develop and provide to the Owner a definitive material takeoff listing all such quantities. If the Contractor’s definitive material takeoff quantities are greater or lesser than the estimated quantity provided by the Owner in the Unit Rate Schedule (such increase or decrease to be determined at the craft level and not at the individual commodity or single line item level, as provided in paragraph 5.3.6 below) by 25 % or more, the unit prices of the affected commodities shall be subject to increase or decrease through negotiation on an equitable basis, taking into account such factors as the bid unit rate, distribution of rates and bid balance, and the scope of the work as affected by the changed quantities. If Contractor intends to seek renegotiation of unit prices pursuant to this clause, Contractor must notify Owner of the quantity changes and the anticipated impact on Contractor’s cost of performance before the issuance of Approved For Construction Drawings. Failure to provide such notice within the period stated herein shall constitute a waiver of Contractor’s right to an adjustment in the unit prices. If Owner intends to seek renegotiation of unit prices pursuant to this clause, it must do so prior to Final Payment.

5.3.6    The determination of whether there has been a 25% variation in estimated quantities shall be made at the craft level (i.e., civil, structural, mechanical, piping, electrical, instrumentation, painting, insulation) as identified on the Unit Rate Schedule, and not at the individual commodity or single line item level, and shall be based on a comparison of:

(a) the sum of the monetary value of the estimated quantities (as provided by the Owner in the Unit Rate Schedule) of all commodities or single line items within each craft times the unit rates bid by the Contractor for each commodity within such craft, with

(b) the sum of the monetary value of the Contractor’s definitive material takeoff quantities within such craft (in the case of a request for unit price adjustment per paragraph 5.3.5 above) or the Contractor’s initial material takeoff estimate quantities within such craft (in the case of a request for schedule adjustment per paragraph 5.3.4 above) times the unit rates bid by the Contractor for each commodity or single line item within such craft.

Such unit rate schedules could also be modified to include the following:

Estimated quantities provided by the Owner in the Unit Rate Schedule are approximate and are used solely for the purpose of evaluating bids. The Owner does not represent, expressly or by implication, that the actual quantities will correspond to the estimated quantities.

FIDIC contracts provide a valuation clause¹ providing entitlement to the contractor for variations in units rates if (a) the measured quantity of the item is changed by more than 25% from the quantity in the bill of quantities or other schedule, (b) this change in quantity multiplied by such specified rate for this item exceeds 0.25% of the accepted contract amount, (c) this change in quantity directly changes the cost per unit of the item by more than 1%, and (d) the contract does not specify this item as a “fixed rate item.”

Variation in quantity clauses are recommended as an equitable way to compensate the contractor if owner-estimated quantities deviate significantly from actual quantities required. Additional time to complete the work may also be appropriate if significant increased quantities are required. If the owner does not include such clauses, qualified contractors who understand such risks may not bid, or contractors that do submit bids may include much higher contingencies in their overall prices or unit rates to cover such risks, thereby potentially increasing the project costs unnecessarily if additional quantities are not required.

¹    See FIDIC Conditions of Contract for Construction MDB Harmonised Edition for Building and Engineering Works Designed by the Employer, Clause 12.3, May 2005.

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