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Understanding Price Adjustments Under a Government Contract

Posted by William Pannier | Oct 04, 2024

When a contract needs to be modified, a contractor may have to ask for a price adjustment. This usually happens through a request for equitable adjustment (REA) or a claim. An REA tends to be viewed as a matter of contract administration, aiming to resolve contract issues through negotiation. A claim, on the other hand, often reflects a dispute where one party believes the contract has been breached, and it may involve legal proceedings. Either way, the contractor's goal is to be made whole.

Common Reasons for Price Adjustments

A price adjustment is often required because of formal or informal changes in performance required under the contract, such as:

·         Adding work to the contract.

·         Removing work (often referred to as deleting scope) from the contract.

·         Swapping one piece of work for another.

Key Elements of an REA or Claim

For an REA or claim to be successful, the contractor must prove:

1.      Entitlement: A legitimate change occurred that makes the other party responsible for additional costs.

2.      Causation: The change directly caused the need for more money.

3.      Resultant Damages: The contractor experienced a clear, measurable increase in costs because of the change.

How to Measure Price Adjustments

A contractor seeking an adjustment bears the burden of proving its loss with sufficient certainty so that damages can be reasonably determined and are not speculative. To calculate the amount of the adjustment, contractors should look at:

·         Direct costs: The actual costs incurred from the additional work.

·         Estimated costs for deleted work: The difference between the expected costs before and after the change.

·         Indirect costs: Costs that may not be directly linked to the specific work but are affected by the contract change.

·         Profit: Adjustments should not unfairly change the contractor's profit or loss. However, contractors are entitled to profit from added work, even if the original work was bid at a loss.

Methods for Calculating Price Adjustments

Contractors have several methods to prove their additional costs:

1.      Actual Cost Method: The preferred approach if the extra costs can be clearly tracked and identified.

2.      Estimated Cost Method: Used when actual costs are unknown, relying on good-faith estimates backed by data.

3.      Total Cost Method: Calculates the difference between the original bid and the total cost of performing the modified contract, but this method is rarely used because it assumes the entire cost increase is solely the government's fault.

4.      Modified Total Cost Method: Similar to the Total Cost Method, but it adjusts the recovery to account for issues like unrealistic bids or other contributing factors to the cost increase.

5.      Jury Verdict Method: A last-resort method used when there's proof of an injury but no clear way to calculate damages. It involves awarding a portion of the requested amount based on what seems fair.

Conclusion

Contract price adjustments are an essential part of managing changes in a contract. For contractors, it's important to provide substantial evidence for both the entitlement and the costs involved. Using the best available data, whether actual or estimated, helps ensure that adjustments are fair and accurate.

 

* This article is provided for information purposes only. It does not constitute legal advice. It is not intended to form an attorney-client relationship. Any legal advice should be sought from an attorney. *

About the Author

William Pannier

Principal Attorney

Pannier Law is here to help

Pannier Law is dedicated to helping companies that do business with the government by providing timely, affordable government contract legal services.

William Pannier is a California attorney practicing in the areas of federal, state, and local government contracts. He assists contractors of all sizes, in various industries, across a broad range of issues.

William Pannier, Esq.

(310) 971-5093

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