Extra Work – Equitable Adjustment

If the government asks a contractor for a cost proposal to perform extra work, and then directs that the extra work be performed before reaching a final agreement as to price, the contractor is only entitled to an equitable adjustment for the actual cost of performing the extra work, plus reasonable overhead and profit, and is not necessarily entitled to the cost it provided in its proposal. Contractors must be very careful not to unwittingly commit fraud, or submit a false claim, by seeking to recover proposal costs for additional work when the actual cost to perform the work was lower than proposed. Conversely, should the performance cost be higher than the proposal cost, the contractor is entitled to an equitable adjustment which includes the higher cost, plus reasonable overhead and profit.

In those cases where a firm fixed – price change order has been issued before the work is undertaken, and the contractor performs the work at a lower cost, the contractor is entitled to reap the reward of the savings it achieved. The rationale for this result is that in a firm fixed – price environment the contractor takes the risk of performing at a higher, or lower, cost. As long as the initial proposal on which the firm fixed – price change order was based was the proposal under which the contractor intended to perform, the contractor is entitled to earn a greater profit than proposed. If the contractor induces the government to issue a firm fixed – price change order by proposing higher costs than it intends to incur (because it has a lower set of costs from other suppliers, etc.), the contractor is guilty of defective pricing and may be charged with fraud or submission of a false claim.

Updated: July 24, 2018