- Project plans
- Project activities
- Legislation and standards
- Industry context
Last edited 30 Oct 2020
Price in the construction industry
Price is the term used to describe the amount of compensation, usually in the form of monetary payment, that is exchanged between one party and another for the provision of goods and/or services. It represents the value that will purchase a certain amount of those goods and services.
Price can be fixed by a contract, determined later by an agreed-upon formula, or negotiated. The ‘asking price’, ‘selling price’, 'quote' or 'tender' is requested by the seller of goods or services. This may be different from the ‘transaction price’, or ‘traded price’, which is the amount that is actually exchanged. The ‘bid price’ is the amount of payment offered by a buyer of goods or services and can be accepted or rejected by the seller.
The general factors that determine price are:
- The amount the buyer is willing to pay.
- The amount the seller is willing to accept.
- The amount the market is paying/accepting.
In terms of land and property, price is the capital value of those assets and is generally related to the income it produces or could produce. For example, the buyer of a revenue-producing property investment, such as a commercial office block, is effectively paying a capital sum today in return for the right to receive a stream of income in the future.
In construction contracts, the price offered by a supplier might be described as a 'tender' and the agreed price might be described as the 'contract sum'. However, prices are rarely 'fixed' even if they are described as being a 'fixed price'. Instead, the price is generally allowed to change under certain circumstances:
- Variations: 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 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 prices risks over which they may have no control, and which might not arise.
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