Genstar Stone Paving Products Co. v. State Highway Administration

WILNER, Chief Judge. This appeal is from an order of the Circuit Court for Baltimore City reversing a decision of the State Board of Contract Appeals. It takes us into the arcane world of State (and Federal) procurement and, in particular, requires us to construe a mandatory clause in a road construction contract. The underlying facts are not in dispute.

In July, 1986, the State Highway Administration (SHA) awarded appellant a $5,951,622 contract to make resurfacing improvements to a two-mile stretch of the Baltimore Beltway. Both the bid and the contract were divided into many separate bid items; some of them called for a lump sum price — a single amount to be paid for that item of work, no matter what quantity of that work might ultimately prove necessary — while others (most) specified unit prices. The unit price items stated a price per unit (per ton, per day, per square or linear foot), the number of units that SHA estimated the job would entail, and an aggregate price determined by multiplying the unit price by the number of SHA-estimated units. Appellant was required under the contract to maintain traffic flow during the construction work, and several of the items related to that function.

Item 1002 called for a lump sum for “Maintenance of Traffic,” and on that item appellant bid (and the contract stated) $67,500. Other items showed unit prices for temporary traffic signs, temporary pavement striping tape, the removal of that tape, and barrier walls. Item 1006 contained a unit price for arrow boards — lighted signs forming the shape of an arrow that direct traffic into adjacent lanes when one or more lanes are closed because of the construction work. We are concerned here with the arrow boards.

The contract specified that the method of measurement and basis of payment for this item “shall be at the contract unit price bid per unit day.” By “unit day” was meant that ⁵⁹⁷ each arrow board used would be paid for once for each day of use, no matter how many times during the day it was moved or replaced. The contract also stated that the contract unit price “shall be full compensation for all labor, materials, equipment, tools and incidentals required to set up and operate at the site and at any relocated sites as required.” SHA estimated that the job would require 200 unit days of arrow boards. In preparing its bid, however, appellant concluded that SHA’s estimate was far too low and that the job would require 555 unit days of arrow board. What it did, therefore, was as follows: (1) it determined that the actual cost of an arrow board for a unit day was $45/board; (2) it estimated that the additional crew and equipment costs associated with the arrow boards would be $783/day; (3) it multiplied the $783 by the 327 additional days it figured the extra crew and equipment would be needed, producing a cost of $256,041; (4) it then multiplied the actual $45 cost by 555 days, yielding $24,975, and added that amount to the $256,041, producing a combined cost of $281,016; (5) it divided that combined cost by 555, producing a per diem cost of $506; and (6) to that amount it then added (i) a $94 markup (making $600), (ii) $200 more on the assumption that a second arrow board crew shift would be required on one-third of the 555 crew arrow board days (raising the unit cost to $800), and (iii) $100 for overhead and profit, making a final unit price of $900. 1 As things turned out, appellant’s time estimate was much closer to the mark than SHA’s.

The job required 514 unit days of arrow board. Part of the State’s procurement regulations is COMAR 21.07.02.03, which requires that every State construction contract containing estimated quantity items include the following “variations” or “VEQ” (variations from estimated quantities) clause: ⁵⁹⁸ “Where the quantity of a pay item in this contract is an estimated quantity and where the actual quantity of such pay item varies more than twenty-five percent (25%) above or below the estimated quantity stated in this contract, an equitable adjustment in the contract price shall be made upon demand of either party. The equitable adjustment shall be based upon any increase or decrease in costs due solely to the variation above one hundred twenty-five percent (125%) or below seventy-five percent (75%) of the estimated quantity.” 2 That clause, in conformance with the regulation, was included as General Provision 4.03 of the contract. As noted, SHA estimated that the job would require 200 unit days for arrow boards; 125% of that estimate is 250 days which, for purposes of this Opinion, we shall refer to as the base units — units to be paid at the contract unit price without any adjustment.

The job actually required 514 days, producing an overrun in excess of the base of 264 unit days; that overrun we shall refer to as comprising the adjustable units — those subject to equitable adjustment in accordance with the variations clause. After the job was completed, SHA examined unit prices for this item in bids on other jobs and, from that examination, found that the average bid price for Item 1006 was $55/unit day. 3 From this, it concluded that appellant’s actual cost for the item did not exceed $55/unit day and that, as a result, the cost to appellant of the overrun, due solely to the overrun, was only that amount. As the contract price was $900/unit day, it demanded an equitable adjustment under GP 4.03 and actually withheld $223,080 ($900-$55 x 264 days) as a retainage. This was based on the notion that, in measuring any equitable adjustment under the clause, the proper approach was essentially to ignore the contract unit price with ⁵⁹⁹ respect to the adjustable units and to pay only the actual cost of providing those units.

Appellant, as might be expected from the circumstances, had a very different view. It construed the clause as requiring SHA to demonstrate (1) that there was a difference between the actual unit cost of the base units (the arrow boards necessary for 250 unit days) and the actual unit cost of boards for the adjustable units (the 264 additional days), and (2) that the difference was due solely to the overrun. That difference, if it could be proved, would then be deducted from the contract unit price. When the SHA procurement officer rendered his decision, appellant appealed to the State Board of Contract Appeals.

At a hearing before that Board, SHA, through an accountant offered as an expert witness, recalculated its demand. Instead of relying on average bids on other jobs, as the procurement officer had done, the witness examined certain of appellant’s records on this job and determined therefrom that (1) appellant’s actual cost per unit day for arrow boards was $76 and (2) there would be no increase or decrease in that unit cost resulting solely from the extra 264 unit days. The witness concluded, however, that appellant had included in Item 1006 certain traffic maintenance expenses that should have been placed in other items and that there was a $385 per unit decrease in those costs with respect to the adjustable units. On that basis, SHA believed it was entitled to an equitable adjustment of $385/ day for 264 days. 4 The Board rejected both analyses, concluding that they were each “flawed by the assumption that a bid price is reflective of actual costs and that the cost for the overrun ⁶⁰⁰ quantity should be compared to the bid price.” It was not the intent of GP 4.03, the Board held, “to allow either party the opportunity to renegotiate in hindsight a bid price when the actual cost is found to be too high or too low due to the variation in actual quantity necessary from the quantity estimated in the bid documents.” Rather, “[I]t is only the actual increase or decrease in costs for the quantity that exceeds 125% of the estimate based on a comparison of actual costs before and after 125% of the estimated quantity is reached and due solely to the variation in quantity that GP 4.03 gives as a remedy.

It is not an escape hatch from a bid price which in hindsight was a ‘bad deal’ for either party.” Under SHA’s approach, it was not necessary to determine, or consider, the actual cost to appellant of providing 250 unit days of arrow board, and it therefore made no such determination. It calculated only the actual cost of providing the 264 overrun unit days, comparing that to the contract unit price (less, it seems, the $100 included therein for overhead and profit). As noted, the Board rejected that approach and construed GP 4.03 as requiring a comparison of actual costs for the adjustable and base units and a showing that the actual unit cost for the adjustable units was less than that for the base units. As SHA failed to make that showing, the Board concluded that it had failed to show a decrease in the costs for the 264 unit days of arrow board overrun due solely to the variation in quantity and thus had not established its right to an equitable adjustment.

SHA appealed that decision to the Circuit Court for Baltimore City which, after a non-evidentiary hearing, reversed the Board and concluded that SHA was entitled to an equitable adjustment. In its remarks from the bench, the court found troubling what it regarded as appellant’s “machination” of “inflat[ing] this particular item to an amount of $826.00 in excess of that which is its actual unit cost per arrow board” by including in Item 1006 costs that were really attributable to Item 1002 (traffic maintenance), fully ⁶⁰¹ expecting a substantial overrun. That conduct, or “machination,” resulted in an “excess profit” which the court found to be against public policy. Implicitly, the court construed GP 4.03 as requiring no more than a comparison between the actual cost of supplying the arrow boards during the overrun period and the unit price under the contract.

If, as the court concluded, the actual cost (of $76) was less than the contract unit cost ($900), SHA was entitled to an equitable adjustment. It therefore remanded the case to the Board for a determination, in accordance with the court’s views, of the amount of that adjustment. Appellant is once again the aggrieved party and has brought this appeal, raising nine issues (some with several subparts). In essence, there is but one issue — the proper construction of GP 4.03.

As we indicated, the underlying facts are not in substantial dispute. Because the issue is one of “statutory” interpretation — the interpretation of a regulation — it is one of law, upon which a court may freely substitute its judgment for that of the administrative agency. Moreover, because the contract language mirrors exactly the required language of the regulation, to the extent there is any ambiguity, we look to the intent of the State in adopting the regulation and do not, as appellant suggests, apply the rule of contra proferentum and construe the clause against SHA because it was the “draftsman.” This is a matter of first impression in Maryland. State law has required a variations clause of this type at least since 1980 (see 1980 Md.Laws, ch. 775, enacting § 3-602(a) to Md.Code, art. 21; current Md.Code, State Fin. and Proc. art., § 13-218(a)(3)).

The regulation implementing that statutory direction and mandating the specific language of the clause was adopted in 1981 by each of the State procurement agencies — the Board of Public Works, the Comptroller of the Treasury, the Secretaries of General Services, Budget and Fiscal Planning, Personnel, and Transportation, and the President of the University of Maryland. See 8:9 Md. Reg. S-l; 8:13 Md.Reg. II-3, II-9. ⁶⁰² The record reveals no helpful legislative history with respect to the regulation other than its similarity to a comparable Federal procurement regulation currently codified in 48 C.F.R. § 52.212-11 (1991).

Both sides thus look to how that Federal regulation evolved and has been interpreted. Two very different, and inconsistent, views have been taken of the Federal clause. The general concept of, or right to, an “equitable adjustment” in a contract price based on changes in the scope of the work or on unanticipated working conditions is something Maryland borrowed from Federal procurement experience, and it applies in a number of different contexts. In Md. Port Adm. v. C.J. Langenfelder & S., 50 Md.App. 525, 540 , 438 A.2d 1374 (1982), we described its function thusly, quoting from Bruce Construction Corporation v. United States, 324 F.2d 516, 518 , 163 Ct.Cl. 97 (1963): “Equitable adjustments in this context are simply corrective measures utilized to keep a contractor whole when the Government modifies a contract.

Since the purpose underlying such adjustments is to safeguard the contractor against increased costs engendered by the modification, it appears patent that the measure of damages cannot be the value received by the Government, but must be more closely related to and contingent upon the altered position in which the contractor finds himself by reason of the modification.” See also General Builders Supply Co. v. United States, 409 F.2d 246, 249 , 187 Ct.Cl. 477 (1969); Burnett Const. Co. v. U.S., 26 Cl.Ct. 296, 301 (1992). We note these general statements because they serve as an important and convenient reference point. Excessive variations over or below estimates stated in the contract, upon which bids were based, can be like games of chance; who is helped and who is hurt can depend on a number of factors, including (1) whether the units actually required are less or more than the base amount; (2) the extent to which the contract unit price approximates the actual unit ⁶⁰³ cost to the contractor, of either the base or the adjustable units; (3) if the variation is due to an overrun, as here, whether and to what extent the unit cost for the overrun differs from the unit cost for the base units; and (4) the extent to which the contractor’s unit cost for the base units is affected by the underrun or the overrun.

When, in an overrun situation, the unit cost for the adjustable units proves to be less than the contract unit cost, it is the government that seeks the equitable adjustment, looking to that difference to measure the amount, the contractor arguing that the proper comparison is not with the contract unit cost but with the actual unit costs of the base units. When, on the other hand, the actual unit cost for an overrun variation is greater than the contract unit cost, the contractor seeks the equitable adjustment and it is the governmental entity that urges an actual cost versus actual cost comparison. If the variation arises from an underrun rather than an overrun, other considerations may also arise, depending on whether the unit cost of the reduced work is increased or decreased because of the reduction. We need to look, then, beyond the result produced by one interpretation or another in a particular case — whether it produces an excess profit or an excess loss — but consider more generally how the clause was intended to be construed in any case.

In urging its approach, appellant relies largely on principles announced in Victory Construction Co., Inc. v. United States, 510 F.2d 1379 , 206 Ct.Cl. 274 (1975), which we shall refer to hereafter as Victory. That case is quite complex and fact-specific. Suffice it to say that there was an overrun on five unit price items in an Army Corps of Engineers construction job. The government, seeking a downward equitable adjustment, placed the burden of proving the actual cost of the overrun units on the contractor.

The contractor did not keep separate records enabling it to determine those costs, however, and so the government calculated the overrun unit costs based on its estimate of the actual unit costs of the base units. The Board of ⁶⁰⁴ Contract Appeals sustained the Corps’ decision, whereupon an appeal was taken to the Court of Claims. In a per curiam opinion adopting the opinion of the trial judge, that Court reversed on a number of grounds. It first found error in the Board’s refusal to give due consideration to an affidavit from the contractor attesting, in effect, that the contract unit prices fairly reflected the actual unit costs for the overrun units.

It then faulted the Board for placing the burden on the contractor to prove its costs. As the proponent of the equitable adjustment, said the Court, “it was the Government, not the contractor, on whom devolved the burden of proving the extent of any downward departure from the unit prices established by the contract for the items comprising the excess work.” 510 F.2d at 1385 , citing Nager Electric Co. v. United States, 442 F.2d 936 , 194 Ct.Cl. 835 (1971). Those two holdings alone would have justified the reversal. The Court went on, however, to conclude that the Board had also misconstrued the variations clause.

The clause actually inserted in the 1965 Victory contract was different than the one at issue here; it did not contain the second sentence of the clause, quoted above, and thus said nothing about the equitable adjustment being based on any increase or decrease in costs due solely to the variation. In 1968, prior to the Board’s decision, a new mandatory clause, identical to that in appellant’s contract, was promulgated. 5 Relying on an Armed Services Procurement Regulation cover sheet accompanying the revision, the Board concluded that the 1968 version was simply a clarification of the previous clause and that the two clauses were substantially the same. Although skeptical, the court accepted that conclusion for purposes of its discussion and decision and ⁶⁰⁵ thus, in effect, construed the very clause at issue here. 6 Id. at 1386. That clause, said the Court at 1386, clearly defined the scope of the inquiry in determining an entitlement to and the amount of an equitable adjustment: “Distinctly, the proponent of an adjustment is told that it will be confined in amount to such cost differentials as are directly attributable to a volume deviation greater than 15 percent from stated contract quantities____ [I]t is simply not reasonably possible to conclude, as did the Board, that the implementary quantity variance clause of the subject contract ‘ * * * contemplate^] a complete repricing of those contract items which vary from the estimated quantities by more than 15%.’ ” To secure a reduction in contract unit price for those excess quantities, the Government was required to demonstrate that the reduction sought represented a “decrease in costs due solely to the variation above 115%.” Id. at 1387.

The record, however, contained “no evidence whatever indicating the realization of cost economies attributable to excess volume,” and, for that reason, the Government had failed to show its entitlement to an equitable adjustment. Id. Significantly, the Court addressed and rejected the very argument made by SHA and stressed by the circuit court in this case, namely, that such a narrow reading of the clause ⁶⁰⁶ would result in a windfall profit for the contractor and that a more expansive interpretation was necessary to discourage “unbalanced bids” by contractors: “Such a bid, it is explained, is one in which the contractor allocates a disproportionate share of indirect costs and anticipated profit to the unit prices bid for those items on which he anticipates an overrun; the object being to reap overgenerous profits should the anticipated overruns materialize. While in the