NJ “Requirements” Contracts: Benefits and Potential Pitfalls

The Benefits and Potential Pitfalls of Entering into “Requirements” Contracts

How NJ Contractors can Benefit from Requirements Contracts

For the Contractor, a “requirements” contract can result in high volume work which permits its operations to expand, offers potentially large overall profits (even at a reduced profit margin) and can also provide the Contractor with opportunities to engage in other large scale projects which the Contractor was previously financially unqualified or otherwise unable to perform.

Benefits for Municipalities & Customers

For the municipality or other public end user, a “requirements” contract offers a wide variety of benefits, such as having a qualified contractor perform necessary repair/maintenance projects on as-needed basis without having to go through the time and expense engaging in the bidding process for each specific project. Furthermore, a requirements contract can, and often does, stipulate a unit price or prices for certain material(s) or other commodity which the Contractor is required to furnish as part of the projects it will be requested (and required) to perform over the duration of the agreement. Such an arrangement offers the municipality or other public entity some “cost certainty” for budgeting its repair/ maintenance costs during present and perhaps a number of future fiscal years.

Thus, a “requirements” contract can be a mutually beneficial arrangement to both the Contractor and public end user.

Potential Pitfalls of Requirements Contracts in NJ

However, the Contractor should be extremely careful to understand whether it will bear the entire risk of significant price fluctuations for those materials it will need to procure in order to meet its obligations under a “requirements” contract throughout its duration.

A recently decided, but unreported New Jersey Appellate Division case upheld the dismissal of a contractor’s claim for an equitable adjustment in its compensation under a road paving “requirements” contract, despite the fact that the price for procuring the asphalt material which the contractor was required to utilize for these projects had more than doubled during the term of the agreement. The Contractor had entered into a “requirements” contract to perform road paving projects on an as-needed basis for a number of municipalities who were members within a consortium over a several year period. The contract set specific unit prices for asphalt and other materials for the entire duration of the contract, regardless of how many purchase orders for road paving work were issued by one or more of the member municipalities. During the term of the contract, the Contractor’s acquisition price for asphalt more than doubled, causing the Contractor to lose substantial sums on those projects affected by this significant price escalation.

In essence, the New Jersey Appellate Division determined that the Contractor bore the entire risk of price fluctuations for asphalt throughout the duration of the parties’ arrangement, pursuant to the express terms of the contract. Therefore, despite the fact that the Contractor had sustained millions of dollars in losses by performing these projects at the unit price for asphalt agreed upon in the “requirements” contract, the Contractor was nevertheless bound to perform thereunder and was not entitled to an adjustment in its compensation from the member municipalities who had projects performed by the Contractor pursuant to the agreement.

Accordingly, if a Contractor is considering entering into a “requirements” contract of any kind, (whether with a public or private entity), it is incumbent to engage experienced legal counsel in this area of the law to negotiate terms which, at the very least, will fairly allocate the risk of significant cost fluctuations in labor and/or materials among the parties to the agreement, as well as other contractual provisions which can better assure the Contractor that its performance under a “requirements” contract will be a benefit to its business, rather than potentially putting the Contractor out of business.