TECHNICAL AR TICLE
W
hat project manager, con-
tract administrator, or auditor
has not encountered changes
in the nature and scope of
work that required a change in price?
These price changes, or “equitable price
adjustments,” are common occurrences in
all contracting, and particularly in govern-
ment contracting. In order for a contractor
to qualify for an equitable price adjust-
ment, he or she must meet certain criteria.
There are essentially three conditions that
must be fulfilled to qualify for an equitable
price adjustment:
• there must have been a contractual
change to the contract by the con-
tracting officer or owner;
• the change has to be in the contractu-
al scope; and
• the change has to increase the con-
tractor’s costs.
When these three facts have been estab-
lished, a contractor is entitled to an equi-
table price adjustment.
The equitable price adjustment at-
tempts to make the contractor whole (in
the same relative time and cost position as
before). It compensates the contractor for
the labor, material, equipment, and over-
head costs incurred for a change in work
or schedule. The compensation for labor
and material is relatively straightforward,
and the rates are easily determinable; labor
rates can be tied to the payroll and materi-
als can be tied to their invoices. Com-
pensation for equipment, however, is a
more difficult issue since even the defini-
tion of equipment is frequently a point of
contention. Equipment compensation
hinges on the manner of equipment own-
ership and the method of accounting.
Because there are various ways of acquir-
ing equipment and accounting for equip-
ment cost, there are various levels of com-
pensation that are based upon which
method of acquisition was used and which
accounting system was applied.
COST REIMBURSEMENT
Contractors have many ways of charg-
ing for contractor-owned equipment,
some of which may not be acceptable
Equipment Compensation in
US Government Construction
Equitable Price Adjustments
Beni Warshawsky
under US government regulations. Con-
tractors may use internal equipment rates
that burden their jobs, including rates they
charge their joint-venture partners, rates
they charge owners, and of course, there
are market rates. The US government, as a
general rule, does not reimburse for any of
these charges. It reimburses only “actual
cost,” unless otherwise stated. The next
section of this article illustrates how the
US federal acquisition regulations deal
with each type of acquisition and account-
ing methodology.
Contractor-Owned Equipment
FAR 31.105(d)(2) states that a con-
tractor is entitled to allowable ownership
and operating costs when equipment is
owned outright. Actual costs from the con-
tractor’s accounting records are used to
determine the ownership costs and operat-
ing costs for each piece of equipment. The
ownership costs are defined as the depre-
ciation, taxes, insurance, facilities, and the
cost of money. The operating costs may
include fuel, filters, oil, and grease; ser-
vicing, repairs, and maintenance; and tire
wear and repair.
The most variable cost listed is depre-
ciation. All normal equipment deprecia-
tion is allowable, if it is reasonable. The
main test for reasonability is whether the
cost is reflected in the contractor’s books
and records and whether it is both used
and acceptable for US federal income tax
purposes (FAR 31.205-11(c)). This means
if a contractor uses the straight-line
method, he or she gets a straight-line
expense amount. If the contractor uses
double declining, he or she gets the dou-
ble-declining expense amount. However,
if contractors are at the beginning of the
Cost Engineering Vol. 38/No. 8 AUGUST 1996
depreciation schedule, they will get more
than if they are at the end of the deprecia-
tion schedule. If the machine is fully
depreciated, there is no compensation for
depreciation because it has been fully
expensed. If a piece of equipment is depre-
ciated over the life of a specific job, the
contractor will not get any additional com-
pensation for depreciation expense if the
job is extended.
Another problem area for contractors
is interest expense. Interest expense is
expressly unallowable under FAR 31.205-
20. The contractor does not receive com-
pensation for his or her interest expense,
regardless of how high or low it is. The
contractor does, nonetheless, receive com-
pensation for the cost of money, which is
provided to all contractors. It does not mat-
ter if the source for the purchase of the
equipment is equity or borrowed capital.
The cost of money is calculated by multi-
plying the capitalized cost by the US
Treasury rate, which is established by the
Secretary of the Treasury under public law
92-41, 85 statute 97, and published semi-
annually in the Federal Register (FAR
31.205-10 and CAS 417) [5].
Operating costs are generally not
problematic except when a piece of equip-
ment is overhauled on the job. In this
case, the cost of the overhaul should not
be expensed to the job but should be cap-
italized. Any expense that extends the life
of a piece of equipment should be capital-
ized, depreciated, and a cost-of-money fac-
tor calculated. Only routine maintenance
is a cost of the job.
There are other equipment acquisi-
tion methods that are considered by the
US federal government to be “contractor-
owned equipment.” These methods in-
clude sale-lease-back agreements, capital
33
leases, and rentals from contractor-owned to be calculated. The only exception to This is the primary way in which the US
subsidiaries, divisions, or family members. this common-control rule is a rental from government compensates contractors for
In the case of sale-lease-back agreements, the contractor’s subsidiary, division, or equipment costs incurred. However, there
the contractor sells his or her equipment family member that is in the business of are exceptions to the rule. The federal
to an outside party and the outside party renting equipment to the general public. acquisition regulations do allow payments
leases it back to the contractor. The con- These rates are acceptable, subject to lim- per rate schedules in two circumstances.
tractor/lessee increases his or her liquidity its of reasonableness (FAR 31.205-36(b)). The first is when the contractor’s records
while the purchaser/lessor receives lease This leads us to the issue of equipment are so poor that costs cannot be deter-
payments plus the depreciation expense as rented from a nonrelated vendor. mined. At that point, the contracting
a tax write-off. When confronted with a Equipment rented from an outside agency may specify the use of a particular
sale-lease-back agreement, the US govern- party is allowable as long as the cost is rea- schedule of predetermined rates. In the
ment acts as if the agreement never took sonable (FAR 31.105(d)(2)(C)(ii)). The second circumstance, the contract speci-
place and limits the rental costs to the US federal acquisition regulations allow fies, in advance, a particular equipment
amount the contractor would have been the rental cost under operating leases to rate schedule by which a contractor will be
allowed if the contractor retained title to the extent that the rates are reasonable at compensated. Rates may or may not be
the equipment (FAR 31.205-36(b)(2)). the time of the lease decision; the regula- reflective of the contractor’s cost. Cost is an
Equipment leased under a capital tions provide five considerations that actual contractor expenditure, while rates
lease is treated as “purchased assets,” as relate to reasonableness (FAR 31.205- are averages. These rates may or may not
required by FAS-13. The lease payments 36(b)(1)). make the contractor whole; since they are
cannot be expensed and the costs must be averages, they could either overcompen-
capitalized. Again, this type of acquisition • What are the rental costs of compara- sate or undercompensate the contractor.
is treated as an item owned outright by the ble equipment? There are various schedules of prede-
contractor (FAR 31.205-11(m)). • What are the market conditions in the termined construction equipment use
Similarly, equipment rented from area? rates. Some of the more common sched-
contractor subsidiaries, divisions, or family • What is the type, life expectancy, con- ules are the US Army Corps of Engineers’
members is treated as contractor-owned dition, and value of the equipment? rate schedule, the Cost Reference Guide
equipment. Rental charges for property • What are the available alternatives? [2], the Blue Book [3], the CalTrans Rate
between any divisions, subsidiaries, or • What are the provisions of the rental Schedule [4], the Contractors’ Equip-
organization under common control are agreement? ment Cost Guide [1], and the Associated
limited to the costs of ownership even if Equipment Distributors’ construction
they are equivalent to market rents. If the equipment cost guides. These rate sched-
contractor’s pension fund, family member, RATE SCHEDULES ules provide average ownership and oper-
or separate division rents equipment to its ating rates for construction equipment.
construction division, the rental cost is dis- Until now, this discussion has focused The allowance for operating costs may
allowed, and the costs of ownership need on cost reimbursement for equipment. include costs for fuel, filters, oil, and

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34 Cost Engineering Vol. 38/No. 8 AUGUST 1996
grease; servicing, repairs, and mainte-
nance; and tire wear and repair.
The rates in the schedules mentioned
above vary considerably. In 1988, an inter-
nal study was conducted at Los Angeles
MetroRail. The study used the US Corps
of Engineers’ rates as its benchmark, thus
making it base 100. In relation to the
Corps of Engineers’ base 100, the Cost
Reference Guide rates were base 134 [2],
and the Blue Book monthly rates were
base 154 [3]. In other words, reimburse-
ment under the Cost Reference Guide
was 34 percent greater than the Corps’
rates [2], while the Blue Book rates were
54 percent higher [3]. With such varia-
tions, the choice of rate schedule is a high-
ly-significant and contentious factor.
o conclude, there are essential-
of the US federal acquisition regulations.
The rate schedules are highly-standard-
ized methods of compensation and are
easily applied. They do not, however,
relate to a contractor’s actual cost and may
over- or undercompensate the contractor.
As can be seen by this discussion, there is
no one perfect method of equipment com-
pensation. Each method deserves a full
review and consideration. It is hoped that
with an informed decision, future disputes
will be minimized and work can go on.
REFERENCES
1. Dataquest. Contractors’ Equipment
Cost Guide. San Jose, CA: Data-
quest, Machinery Information
Division, 1992.
2. Dataquest. Cost Reference Guide.
5. Federal Register. Washington, DC:
US Government Printing Office,
1994.
Beni Warshawsky is
senior auditor for con-
struction claims and
change orders at the
Los Angeles County
Metropolitan Transpor-
tation Authority (LAC-
MTA), which is build-
ing the Los Angeles Metro, the largest pub-
lic works project in the US. He has over 20
years of experience in auditing, cost control,
and construction. Before joining LACM-
TA, he worked for New York City,
Washington State, and the US Department
of Defense. He served as staff consultant to
the Washington State Governor’s Task

T ly two ways in which equip-

ment is reimbursed: by cost
reimbursement or by a rate
schedule. Each method has its advantages
and disadvantages. Cost reimbursement
gives the truest picture of the contractor’s
cost; however, it is a highly-complex
undertaking that is subject to the vagaries
of the contractor’s accounting system and
3.
San Jose, CA: Dataquest, Machinery
Information Division, 1992.
Dataquest. Rental Rate Blue Book.
San Jose, CA: Dataquest, Machinery
Information Division, 1992.
Force on Catastrophic Health Care Costs
and as fiscal manager of the New York City
Ambulatory Care Program. He received his
undergraduate and graduate degrees from
the City University of New York. Mr.
4. Department of Transportation, (Cal- Warshawsky is a certified government
Trans), state of California. Equip- financial manager.◆
ment Rental Rates. Sacramento, CA: Back to Table of Contents
CalTrans, 1992.

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