Equitable adjustment: Overview, definition, and example
What is equitable adjustment?
Equitable adjustment is a legal term used in contract law, particularly in government and construction contracts, that refers to a modification of the contract terms to compensate a party for changes in the scope of work, unforeseen circumstances, or other events that result in additional costs or delays. An equitable adjustment ensures that the affected party receives fair compensation for the changes or disruptions that were not initially accounted for in the original contract. This adjustment is designed to maintain fairness between the parties involved, often when the original terms become impractical or inequitable due to unforeseen conditions.
For example, in a construction project, if unexpected soil conditions are discovered during excavation, the contractor may request an equitable adjustment to the contract price to cover the additional costs incurred.
Why is equitable adjustment important?
Equitable adjustment is important because it allows for fairness and flexibility in contract performance, especially in long-term or complex contracts where changes and unforeseen events are inevitable. Without equitable adjustment, one party could be unfairly burdened with the additional costs or risks caused by circumstances beyond their control. It ensures that the contract remains fair and balanced, preserving the relationship between the parties while also allowing for modifications to accommodate unforeseen events.
For businesses, equitable adjustments are essential for maintaining profitability and avoiding disputes over changes in the scope of work. For contractors or service providers, the adjustment ensures they are compensated for extra work or costs that arise unexpectedly, preventing them from being financially penalized for situations outside of their control.
Understanding equitable adjustment through an example
Imagine a government contractor is working on a highway construction project and encounters unexpected underground utilities that were not marked on the initial plans. As a result, the contractor needs to modify the project to work around these utilities, causing delays and additional costs. The contractor submits a request for equitable adjustment, arguing that the change in circumstances was unforeseen and outside of their control.
The government agency reviews the request and agrees to modify the contract price to cover the additional costs incurred due to the unexpected conditions, thus providing a fair adjustment for the contractor. This equitable adjustment ensures that the contractor is not financially penalized for circumstances that were not part of the original contract.
In another example, a supplier of materials to a construction project faces a significant increase in the cost of raw materials due to unforeseen market conditions. The supplier may request an equitable adjustment to the contract price, citing the unexpected cost increases that were outside their control.
Example of an equitable adjustment clause
Here’s how an equitable adjustment clause might appear in a contract:
“In the event of changes in the scope of work or unforeseen conditions that result in additional costs or delays, the Contractor shall be entitled to an equitable adjustment to the contract price and/or time schedule. Any such adjustment must be agreed upon by both parties in writing and shall reflect the fair compensation for the work performed or delays incurred due to these changes.”
Conclusion
Equitable adjustment is a crucial concept in contracts, especially in industries like construction or government contracting, where unforeseen changes can significantly affect the performance of the contract. By allowing for fair adjustments to the contract terms, it helps ensure that both parties are compensated fairly and the contract remains workable despite unforeseen circumstances. It prevents one party from bearing undue financial risk due to events outside their control and fosters a fairer and more adaptable contractual environment.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.