October 18, 2016
By Jeffrey A. Wieland
Jeff Wieland is a Shareholder in the firm’s Construction Law Department. Jeff can be reached at 612.359.7605 or firstname.lastname@example.org
Most of the disputes I’ve seen between contractors and the North Dakota Department of Transportation (NDDOT) seem to involve a disagreement over the actual quantities of work or materials placed on a project and the estimated quantities provided by NDDOT used to bid the job. Contractors rely on the estimated quantities to calculate how much manpower and equipment is needed to perform the work in the allotted time so they can price their bids properly. Large differences between the planned and actual quantities wreak havoc with a contractor’s cost structure. Underruns mean that the contractor has idle people and equipment on-site, costing the contactor money but not generating revenue. Overruns are problematic, too, because oftentimes the additional work must be completed using unplanned overtime or with additional equipment. Either way, differences between estimated and actual quantities on projects can have big financial impacts on contractors.
The frequency with which this issue arises caused me to wonder how accurate NDDOT’s estimated quantities are. Because I’m a recovering engineer, I like to use numbers and data to answer questions like that. The final estimate on each NDDOT project gives the estimated and final actual quantities for each pay item on that contract. That data shows the accuracy of NDDOT’s estimates, so by looking at a number of final estimates, it is possible to analyze the accuracy of NDDOT’s estimates. I did just that, and my analysis revealed some insights that may be useful to contractors bidding on NDDOT projects in the future.
Using North Dakota’s open records statute, I requested copies of all the NDDOT final estimates issued in 2015 for projects valued at more than $2 million. I received 62 final estimates, representing over $437 million in work. The projects ranged in value from $2 million to $37.8 million, and averaged about $7 million.
I analyzed the data from those final estimates, over 5,000 individual line items, to answer the following questions:
Overall Accuracy of NDDOT Project Estimates
Looking at the big picture, NDDOT did pretty well estimating the 62 projects that were completed in 2015. NDDOT estimated that the 62 projects would cost a total of $454.7 million. The work actually cost 96% of that amount, $437.2 million. At the project level, the worst underrun was about 17%, while the biggest project overrun was 18%. As the histogram below shows, most of the projects slightly underran the estimated cost. The median actual to estimated project cost was 97%, meaning there were as many projects below 97% as above it.
Biggest Pay Items
When looking at data, it usually makes sense to concentrate on the biggest, most important pieces first. I wanted to know where NDDOT spends the most money on its projects. The table below shows the pay items that totaled more than 1% of the $437.2 million spent on the 62 projects.
|Pay Item Description||Total Amount Paid on Pay Item||% of Total Contract Paid Amount|
|PG 58-28 Asphalt Cement||$53,038,235.43||12.13%|
|Superpave FAA 45||$43,394,557.64||9.92%|
|Salvaged Base Course||$33,202,635.87||7.59%|
|Recycled Asphalt Pavement – Superpave||$27,367,570.79||6.26%|
|PG 64-28 Asphalt Cement||$18,358327.66||4.20%|
|Riprap – Loose Rock||$13,863,312.89||3.17%|
|Concrete Pavement – White Topping||$11,063,225.52||2.53%|
|Superpave FAA 42||$8,886,884.98||2.03%|
|Superpave FAA 43||$8,275,184.40||1.89%|
|PG 64-34 Asphalt Cement||$8,267,812.20||1.89%|
|Milling Pavement Surface||$5,822,263.16||1.33%|
|Aggregate CL 3M||$5,319,610.74||1.22%|
|Concrete Placement – Doweled||$4,723,916.54||1.08%|
I was surprised to see that the paving pay items so heavily outweighed the dirt work pay items. To show the distribution of expenditures across the different pay items, I grouped them according to their specification sections. The chart below shows that NDDOT spends over half of its project money on paving (bituminous and rigid), and roughly only a quarter of its budget on earthwork and base materials.
Most Commonly Busted Pay Items
In this paper, I define a “busted” pay item as one in which the actual quantity is greater or less than the estimated quantity by at least 25%. Estimates aren’t expected to be exactly correct, but at some point, estimates are so far off the mark that they are no longer good estimates. I drew that line at +/- 25% because that is also the line that NDDOT draws for allowing equitable adjustments in unit prices under its Variation in Estimated Quantities clause.
The first detail level analysis I did was to find the pay items that were most frequently busted. The top ten most frequently busted pay items are shown in the table below.
|Pay Item Description||Instances of Busted Estimates||Total Value of the Errors|
|SS1H, CSS1H or MS1 Emulsified Asphalt||35||$756,116.52|
|Traffic Control Signs||35||$120,092.49|
|Short-term 4 in Line – Type NR||29||$153,511.04|
|Fiber Rolls 12 in||25||$446,025.28|
|MC70 or 250 Liquid Asphalt||23||$1,913,138.84|
Notice that there is no strong correlation between the number of instances of busted estimates and the total value of the errors. For example, the Liquid Asphalt estimate was only busted 23 times, but the financial impact of those busts dwarfed the impact of several pay items that were busted more frequently, such as Traffic Control Signs. Nonetheless, contractors might want to give these pay items a little extra scrutiny during future bids just because they have been busted so frequently in the past.
Biggest Impact Busted Pay Items
The data showed that not all estimate busts are financially significant. For example, on one project, the seeding pay item overran by 38%. NDDOT estimated it needed 4.9 acres of seeding, and the project required 6.7 acres. But because the unit price for the seeding work was only $0.50 per acre, the financial impact of the overrun was less than a dollar, $0.92.
The second detail level analysis I did was to find the pay item busts that had the most total financial impact. The top ten are shown in the table below.
|Pay Item Description||Instances of Busted Estimates||Total Value of the Errors|
|Riprap – Loose Rock||12||$3,525,482.76|
|Salvaged Base Course||21||$3,192,003.80|
|Superpave FAA 45||8||$2,783,160.31|
|MC70 or 250 Liquid Asphalt||23||$1,913,138.84|
|PG 58-28 Asphalt Cement||12||$1,790,943.31|
|Recycled Asphalt Pavement – Superpave||5||$1,343,820.88|
|Aggregate CL 3M||3||$1,255,189.95|
|Superpave FAA 42||4||$1,090,185.06|
Interestingly, five of the top ten biggest pay item busts were for paving items. I’m not sure how those estimate errors arose because the roadway profile and dimensions and the pavement thickness is usually specified in great detail in the plans and specifications. The bust in riprap estimates was not terribly surprising given the amount of flood control work that NDDOT has been doing in recent years, particularly around Devils Lake. Contractors should definitely pay extra attention to these pay items in future bids, because even those items that are not frequently busted, can still have a huge financial impact on the project.
Eligibility for Equitable Adjustment
NDDOT’s Standard Specifications acknowledge that a 25% or greater difference between the estimated and actual quantities can constitute a significant change in the work that can justify an equitable adjustment to the bid unit prices. The Standard Specifications, however, limit that eligibility for an equitable price adjustment to major contract items. Major contract items are those pay items that constitute at least 5% of the original contract amount. Minor contract items, those that constitute less than 5% of the original contract amount, are not eligible for an equitable price adjustment under §104.02(C) simply due to a busted quantity estimate.
The data shows that policy to be inequitable. Of the 5007 pay items in the 2015 data, 1,133, or 22.6%, had blown quantity estimates. Blown estimates are fairly common. But of those 1,133, only 30 were on major items. That means that 97.4% of the time, a difference between estimated and actual quantities that exceeded 25% was not eligible for an equitable price adjustment under Standard Specifications §104.02(C). The purpose of contract provisions like this one, usually called Variation in Estimated Quantities (VEQ) clauses, is to prevent haggling over financially insignificant estimate errors. The seeding example discussed above is a good illustration. Even though there was a quantity estimate error that exceeded 25%, the financial impact was less than a dollar, so spending time negotiating a unit price adjustment would be wasteful. Drawing a line to determine when to allow price adjustments may make sense in some cases. But drawing that line based on a percentage of contract value does not, especially when that line is as high as 5%.
Contract values can vary greatly. The projects I looked at ranged from $2 million to over $37 million. NDDOT draws the line between major items, for which equitable adjustments based on quantity errors are allowed, and minor items, for which such adjustment are not allowed, at 5% of contract value. But 5% of $2 million is very different from 5% of $37 million. An example from the data will show why drawing the line based on a percentage of contract value is inequitable. On one $2.95 million dollar project, borrow excavation constituted just over 5% of the contract value, so it was a major item. The borrow excavation overran the estimate by 29%, resulting in a financial impact of $46,388. Because this was an estimate bust on a major contract item, the contractor could ask for an equitable adjustment under the VEQ clause. On a different project, one that cost $37 million, flagging was a minor item. The bid amount for flagging was $139,000, but the final cost was $1,473,278, more than 10 times the bid amount. The financial impact of that estimate bust was over $1.3 million. Yet, that estimate bust was not eligible for an equitable adjustment under the VEQ clause, even though the financial impact of that bust was more than 28 times larger than the impact on the borrow excavation overrun on the smaller project. There were 131 instances of minor contract items that were larger in financial impact than the borrow excavation bust discussed above, yet they were excluded from consideration for an equitable adjustment under the VEQ clause.
NDDOT’s Variation in Estimated Quantity clause also hinders the Department’s affirmative action program. The Department’s affirmative action programs attempt to encourage disadvantaged business enterprises (DBEs) by setting participation goals in many of its contracts. Contractors meet those targets by subcontracting scopes of work to DBEs. By definition, DBEs are smaller companies because when a company reaches a certain size, it can’t really be considered disadvantaged anymore. Small companies are unlikely to have the physical or financial resources to handle large scopes of work. Fewer DBEs are likely to have the wherewithal to perform major contract items; it is more likely that minor items will be subcontracted to DBEs – i.e. items that are less than 5% of the project cost. It is also likely that DBEs, like all smaller companies, will not be able to withstand large variations in planned work. NDDOT’s VEQ clause makes that problem worse by prohibiting equitable adjustments for quantity busts on minor items. NDDOT’s VEQ clause has a disparate impact on the very companies that NDDOT is trying to help through its affirmative action programs.
While NDDOT does a reasonably good job at estimating the overall cost of its projects, contractors would be wise to pay particular attention to the estimates for paving, riprap, and flagging. Contractors should consult their attorney if they suspect they are encountering a busted quantity estimate on a project. Even if the busted estimate is on a minor contract item, there are contract provisions other than the VEQ clause that may allow the contractor to seek an equitable unit price adjustment.
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“Westra, a longtime partner at Fabyanske, Westra, Hart and Thompson, has been a prominent commercial real estate attorney in the Twin Cities since 1975. He has been involved in hundreds of local real estate projects and has represented some of the largest lenders, developers, owners and investors in the metro. Westra has been an expert in a wide variety of real estate-related practice areas, including real estate finance, zoning, land use and leasing. Westra was an instructor at Hamline Law School and a mentor to many young real estate attorneys in the Twin Cities.”
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 There is no guarantee that future projects will exhibit the same patterns as the ones I studied. This paper in no way affects a contractor’s obligation to carefully study the project’s plans, specifications, and actual conditions before bidding on a project.
 See N.D.C.C. § 44-04-18. This is the state law equivalent to the federal Freedom of Information Act.
 Not all of this work was performed or paid in 2015. Several of the projects were multi-year projects. My data request was for the final estimates that were issued in 2015.
 I’m defining a “significant estimated quantity error” as a difference between the estimated and final quantity of more than 25% in either direction. That is the same tolerance band used by NDDOT in § 104.02(C) of its Standard Specification (2014 ed.). I will refer to these errors as “busted estimates” in this paper.
 See the NDDOT Standard Specifications for Road and Bridge Construction for more detail on which pay items fit into each specification section.
 The “error” is the absolute value of the difference between the estimated bid value and actual amount paid. I used absolute values to avoid offsets between underruns and overruns. For example, consider two projects that had busted estimates in the flagging pay item, one with a $100,000 overrun while the other had a $100,000 underrun. The total value of those errors, using my methodology, is $200,000, not $0.
 See NDDOT Standard Specifications (2014 ed.) at § 104.02(C). Contractors do not automatically get to adjust prices under this provision when there is a busted estimate. They still have to show that the estimate bust had a significant impact on their cost structure.
 See NDDOT Standard Specifications (2014 ed.) at § 101.04 (defining “Contract Item”).
 There are other bases for equitable price adjustments that may apply to minor contract items in the Standard Specifications. Your attorney can provide guidance on how to seek a contract adjustment using those provisions.
 Flagging remained a minor item even considering the actual quantity on this contract.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2016 FWH&T.