Frequently Asked Questions
When a credit is due to an owner because a scope of work is deleted from the contract, is the owner legally bound by the subcontract agreement amount executed between the prime contractor and subcontractor for the deleted work that was to be performed primarily by the subcontractor?
Background: The owner directed the prime contractor to delete some work that was to be performed by prime contractor's subcontractor. The prime contractor executed a Subcontract Agreement with their subcontractor to perform the work. When they were directed to delete the work the owner asked the prime contractor to submit a credit cost proposal. The prime contractor submitted their cost based on the amount agreed upon in the subcontract agreement. However, the owner's estimate was much higher than the contractor's cost price. At the negotiations the contractor claimed that the owner is bound by the terms and conditions laid out in the subcontract agreement. Federal courts have ruled that a credit due to the owner should be based on what the cost would have been if the work was performed and not what the contractor originally bid. Is the owner bound by that Agreement or should the credit to the Owner be based on what the cost would have been if the work was performed?
The FTA Best Practices Procurement Manual (BPPM), Section 184.108.40.206 - Pricing of Construction Changes, agrees with your position that the credit should be based on what the work would have cost to perform, not the amount in the bid.
There is no privity of contract between the owner and the subcontractor. Therefore, whatever agreement was reached between those two parties is no consequence to the owner. (Posted: January, 2012)