Feds Object to Unilateral Contract Price Reductions

A somewhat disconcerting trend from several state and local agencies is to attempt to unilaterally reduce existing contract prices is apparently not acceptable to the federal government.

A few agencies have sent letters to their consultants that effectively state “due to budget constraints we are going to reduce the price of all contracts by X%, and there will no changes in either scope or schedule”.

While we have sympathy with agencies in the current economic crunch on their available funds, this is clearly a unilateral change in a single contract term (price) being imposed by one party to the contract.

FHWA has advised one state DOT in a letter dated October 21st, that this process does not comply with applicable laws and regulations. FHWA states that any change in a contract term requires a renegotiation of all terms of the contract, including reducing scope if price is reduced. In other words a unilateral decision by one party in the contract is not a valid contracting approach.

We believe this advisory letter may discourage other agencies that are thinking of using this approach to reduce their expenses. We also believe this is a fair approach by FHWA, since basic contract law does not permit unilateral contract changes such as were being sought by the government.

AASHTO Audit Committee Adopts New Audit Guide

By a vote of 40 to 3 the AASHTO Audit Committee has adopted the proposed revised Audit Guide.

The draft Guide now goes to the full AASHTO group for approval, and is expected to be adopted at their meeting the week of October 19th.

If adopted as expected, the Guide will become effective January 1, 2010.

Since this Guide requires firms serving DOT clients to be proactive to obtain approval of their costs, we urge all firms to become familiar with its contents and begin to plan for compliance.