Under a unit price contract, contractors and subs are paid for the actual quantity of each line item, or “unit” of work. Often, these contracts will state an estimated amount of units to complete the contract, and these estimates are rarely dead-on. There’s some room for flexibility, but when amounts substantially vary from what’s in the contract, a variation in quantity claim can provide relief.
Unit Price Contracts
Unit price contracts are pretty common in construction. By utilizing this method, “units” of work are organized by creating value for a particular portion of work based on the cost of that performance. Things like the materials and equipment needed, man-hours required, overhead and profit, taxes, and more might go into creating a price for a unit of work.
This calculation is crucial! In order to run a profit, a contractor or sub will need to understand the costs they have for performing each unit, as well as how many units will be necessary, in order to run a profit and maintain healthy margins. The latter (how many units will be required) is what variation in quantity claims are concerned with.
Preparing a construction estimate is a complex process. If an estimate is too incorrect – in either direction – that variation can disrupt the calculations made for that unit price contract. When the prices go over or under a certain percentage of the initial estimation, either party can demand a price adjustment to avoid any significant losses or unjust enrichment.
What are Variation in Quantity Clauses?
Variation in quantities clauses fairly assign the risk of any changes in the estimated quantity of unit priced items. Thus, large quantity variations will likely require some adjustment to the contract price to prevent severe losses or large profit margins. These are required by the Federal Acquisition Regulation (FAR) for government contracts and frequently used by private owners as well.
How do Variation Clauses Work?
The use of variation in quantities clauses is so prevalent the AIA General Conditions include them as well. Under such a contract, the clause states that:
“If unit prices are stated in the Contract Documents… and if the quantities originally contemplated are so changed… 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.”
Disputes often arise when the actual quantities differ significantly from the quantity estimated at the time of contract. A variation in quantity clause provides that after a certain amount of variation (typically 15-25%) there will be an equitable adjustment of the contract price. But only to the extent that the variation quantity caused an increase in the actual performance cost per unit. This is meant to avoid any disputes regarding how much the profits and overhead costs are affected by the variation.
Limitations With Variation in Quantity Claims
Sometimes, the increase or decrease in quantity will not be covered under the variation clause. Other contributing factors may change which clause governs the claim for the adjustment of the contract price. In a situation where the variation is a result of physical site conditions that were not known or reasonably foreseeable by either party, recovery based on differing site conditions might be more appropriate. Conversely, if an overrun is the direct result of the government’s failure to provide pertinent information to the contractor concerning the project, a superior knowledge claim could make more sense.
- Government Construction Contracts | A Guide for Bids, Bonds, and Payments
- Construction Contracts: A Deep Dive on Breach of Contract
- How to Use Construction Allowances | Construction Accounting
- What is Construction Contingency? | Construction Accounting