Fixed price construction contract
Lump sum (or stipulated sum) contracts are sometimes referred to as ‘fixed price’ contracts, although strictly this is not correct.
On a lump sum contract, a single ‘lump sum’ price is agreed before the works begin. If the actual cost of the works exceeds the agreed price, then the contractor must bear the additional expense. If on the other hand the cost of the works is less than the agreed price, the contractor will benefit from the savings.
This is unlike a guaranteed maximum price contract, where the contractor bears any additional costs above the guaranteed maximum price, but if the cost is lower than the guaranteed maximum price, then savings may go to the client, to the contractor or are shared. An extension of this is the target cost contract, where there is a ‘pain / gain’ agreement allowing the client and contractor to share both additional costs and savings.
However, lump sum contracts tend not to be fixed, but allow the price to change under certain circumstances:
- Variations: These are changes in the nature of the works. Most contracts will contain provision for the architect or contract administrator to issue instructions to vary the design, quantities, quality, sequence or working conditions.
- Relevant events: A relevant event may be caused by the client (for example failure to supply goods or instructions), or may be a neutral event (such as exceptionally adverse weather) and may result in a claim for loss and expense by the contractor.
- Provisional sums: An allowance for a specific element of the works that is not defined in enough detail for tenderers to price.
- Fluctuations: A mechanism for dealing with inflation on projects that may last for several years where the contractor tenders based on current prices and then the contract makes provisions for the contractor to be reimbursed for price changes over the duration of the project.
- Payments to nominated sub-contractors or nominated suppliers.
- Statutory fees.
- Payments relating to opening-up and testing the works.
A truly 'fixed' price contract would not necessarily be in the interests of the client as it would require that the contractor price risks over which they may have no control, and which might not arise.
The Code of Estimating Practice, seventh edition, published by the Chartered Institute of Building (CIOB) in 2009 defines a fixed price contract as, ‘…a contract where the price is agreed and fixed before construction starts’. It suggests that a firm price contract is, ‘…a contract where the prices is not subject to fluctuations during the construction period’, where fluctuations are, ‘…the increase or decrease in cost of labour, plant, materials and/or overheads costs that may occur during a contract.’
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