Lump Sum Cash Contract

What is Included in 'Lump Sum'?

A simple matter that often causes confusion is exactly what is included in a lump-sum price.

Take a typical contract designed by the employer. The contractor is required under the contract to provide the works defined on the drawings and in the specification. In other words, the drawings show the extent and the configuration of the design. The specification describes the composition and quality of the work. Thus, it is clear that the lump-sum requires the contractor to provide whatever is included in the drawings and specification.

Confusion

Confusion often arises when introducing a bill of quantities into the mix. Such confusion is increased when engineers or other contract administrators try to insist something included in the bill of quantities is included in the lump-sum price. Particularly when it is not detailed in the drawings or specification. This may manifest itself in the engineer’s insistence that additional work is provided with no addition to the lump-sum price. Or, even that the lump sum price be reduced if work included in the bill of quantities is not required.

Consider that in many cases the party appointed to administer the contract by the employer is often the designer. Could the engineer have a vested interest in covering up design errors, omissions and inaccuracies in the bills of quantities? They may not wish to be the bearer of bad news of this nature to the employer.

The Contract Wins

The contract will always place the drawings and specification in a higher order of precedence than the bill of quantities. Therefore, these are the ruling documents in the case of any conflicts. Employers often try to have their cake and eat it. They may include a provision to the effect that if something is required by one document but not required by another, it shall be provided within the contract price.

However, this will not work when the contract also includes provisions to the effect that:

  • The bills of quantities are only an estimate.
  • They are provided only for the purposes of calculating monthly payments and for the evaluation of variations.
  • The bills of quantities may not be relied upon.
  • They should not be taken as being accurate.

In such cases, the employer or engineer cannot argue that such a provision may be used to define the lump-sum. Particularly when drawings and a specification exist that are accurate enough to be used to construct the project.

One-Way Traffic

It is not all one-way traffic however. If a contractor relies on the bill of quantities when pricing, they only have themselves to blame if it does not contain everything shown on the drawings and in the specification. Nor can the contractor complain if the quantities are under-measured. Furthermore, the contractor's tender will not be competitive if they price for work that is included in the bill of quantities but not in the drawings and specification.

Key Considerations:

The following questions may help you to ascertain the correct principles to apply to your project:

  1. If something is shown on the drawings and/or in the specification but not included in the bill of quantities, can the contractor claim additional payment? No. The drawings and specification define what is included in the contract price.
  2. If something is measured in the bill of quantities but not shown on the drawings and/or in the specification, can the employer make a deduction from the contract price? No. The drawings and specification define what is included in the contract price.
  3. If the bill of quantities contains lower quantities than those accurately ascertained from the drawings, can the contractor claim additional payment? No. The accurate quantities measured from drawings define what is included in the contract price.
  4. If the bill of quantities contains greater quantities than those accurately ascertained from the drawings, can the employer make a deduction from the contract price? No. The accurate quantities measured from drawings define what is included in the contract price.
  5. If a work item or items are to be omitted entirely and the bill of quantities include different quantities to those shown on the drawings, which should be used as the basis for the omission? The quantities shown on the drawings are deemed to be included in the contract price so, whether they are greater or less than those shown in the bill of quantities, these should be the omitted quantities.
  6. If the bill of quantities includes a higher or lower specification for a measured item to that included in the contract specification, which is included in the contract price? The quality or item included in the contract specification is deemed to have been included.

Find out more:

For more information on how our training courses can help you, take a look at our e-courses or get in touch today.


The Difference Between Claim and Dispute Submissions - FIDIC Omissions

The Difference Between A Claim to the Engineer & A Claim in Arbitration?

A student recently asked, "is there any difference between a claim submitted to the Engineer and one submitted for arbitration?" My response was along the lines of “Yes, there frequently is, but there shouldn’t be”.

The Scenario:

Let me explain why by describing a very frequent scenario related to claims.

  1. The Contractor considers that he has a justifiable claim for a significant amount of money or an extension of time. This claims in turn, will negate delay damages.
  2. Our Contractor reviews the resources available to them. They allocate responsibility for preparing the claim. However, they do not ascertain whether the person preparing the claim has adequate qualifications or experience to prepare it to a suitable standard.
  3. The person given the responsibility does their best. However, lacking the necessary experience and skills, the claim is not prepared to a good standard.
  4. The Engineer rejects the claim because it cannot be understood. It does not contain adequate information, it is not substantiated or it does not prove that the claim is justifiable. Even an impartial engineer would be acting correctly in doing so. A defensive engineer would love that fact that he has an excuse to reject the claim.
  5. The contractor, still considers that a justifiable claim exists and also thinks that the engineer has acted unfairly. After several months of indecision, the Contractor elevates the matter to a dispute and calls in the lawyers.
  6. The lawyers examine the claim and response and advise the Contractor that they agree the Contractor has entitlement. But, the claim needs expressing properly if the matter is to succeed at adjudication or arbitration.
  7. The contractor still does not have anyone on the team with qualifications or experience to prepare an adequate claim. So the lawyers offer to either prepare it themselves. Or they recommend that the contractor bring in someone with appropriate skills.
  8. The properly prepared claim appears before the adjudicators and arbitrators. They in turn make an award in favour of the contractor. The whole process by this time will have taken years rather than weeks and involved the contractor in considerable time and cost.

The Reality

Maybe now you can understand why, frequently there is a difference between a claim to the Engineer and one submitted for arbitration. More importantly, you may see why there shouldn’t be such a difference. Had the Contractor just prepared his claim to a suitable standard in the first place, rather than trying to save money on the claim preparation, the matter would have been resolved quickly and for a reasonable cost.

Avoid the risks posed by poor training and the lack of skills highlighted in this article: join one of our courses. Find out more about our e-courses here.


Variations and Preliminaries

Claims for Additional Preliminaries as a Result of Variations

We are often asked for advice on variations. One question crops up time and time again. Does the contractor have entitlement to payment for additional preliminaries arising from variations?

The short answer to the question (as usual) is that it depends.

What Are Preliminaries?

The preliminary section of the bill of quantities is where the contractor prices for project overheads and running costs. These will include things like:

  • Mobilisation and demobilisation.
  • Costs for management, administration and non-productive labour.
  • Costs for plant, equipment offices and temporary buildings.
  • Contractual costs.

Many of these costs are time related. Provided there is no delay to the project or significant changes to the works, such costs will remain fixed.

If a variation arises, the contractor’s payment will depend on the contract. In the case of remeasurable contracts, you can expect this to be picked up in the remeasurement. In the case of lump sum contracts, these costs are measured and evaluated separately.

The contract rates and prices will include overheads and profit. However, they will not include any additional allowance for ‘preliminary’ costs. So, is this the contractor's due entitlement under such a procedure?

Cause & Effect

To answer this question, we need to look at our old friends ‘Cause and Effect’. It may be helpful to consider these questions:

  1. Has the variation had an effect on the time for completion? If so, the contractor may claim payment for costs. This is because they have incurred costs by providing site overheads for a longer period than originally envisaged.
  2. Has the variation caused the contractor to mobilise additional plant, equipment or personnel? If so, the contractor is entitled to the reimbursement of such costs, because they are not compensated within the rates and prices used to evaluate the varied work.
  3. Has the variation caused the contractor to deploy additional non-productive resources to carry out the work? If so, the contractor may claim reimbursement of such costs for the same reasons.
  4. Has the variation caused the contractor to defer the demobilisation of time-related resources? The additional time such resources require are not compensated through the rates and prices so there is likely entitlement for additional payment here.

As you will hopefully see from the above examples, there is no blanket yes or no answer to the question. In each case, we must examine the matter carefully. Therefore it is not always easy to ascertain whether the contractor may claim additional payment for ‘preliminary’ items.

Looking for further advice on how to measure additional preliminary costs? This article from our friends at Decipher Consulting might be helpful.

We also cover the topic of preliminaries and variations extensively in The Perfect Claim e-course.


construction 2020

Reflections on Construction in 2020

To say that 2020 has been an unusual year would be an understatement. Not just for the construction industry, but for all of us around the world. Despite the challenges, things are not entirely doom and gloom. We have all learned in one way or another from the COVID-19 experience. Sometimes we need a challenge to force us to think about alternative ways of doing things.

Read more


final account disputes

Why do Final Accounts lead to Disputes?

I recently provided advice on a dispute of US$250M. This sum includes variations, prolongation costs, acceleration costs, disruption costs and delay penalties. The dispute crystalised when the contractor submitted his final account. This is a familiar occurrence. In fact, a large proportion of disputes occur when the project is either nearing or after completion.

Read more


Construction contract FIDIC 2017

How Does FIDIC 2017 Affect Claims?

I guess like many of you, I have not had the opportunity to examine the 2017 editions of the FIDIC contracts in much detail, because as yet, I have not come across any projects that are using them. This situation will, however, gradually change. As it does, we will need to know what has changed and how it has changed. As such projects reach final account stage there will undoubtedly be claims to resolve and disputes to settle. I have recently been doing research for a forthcoming book, so thought it would be worthwhile to highlight the changes from a claims perspective.

Employer's Claims

Read more


Progress Updates – Fact or Fiction?

Contractors often shoot themselves in the foot when preparing progress updates for the employer’s team. Many times we see months worth of updates which present a rose-tinted view of project progress.

Whilst it is tempting to keep reporting good news month-on-month, be wary. A less than competent consultant may believe such reports because good news will not involve them in additional and troublesome work. However, you could be causing problems for yourself further down the line.

Problems frequently arise when the contractor needs to submit a claim for an extension of time. It becomes very difficult for him to subsequently tell the employer’s team: “I know we kept telling you that there was no delay to the completion date, but actually there is and it’s not our fault, so please can I have an extension of time.

Read more


Letters Abbreviations

When Should You Use Abbreviations and Acronyms?

I have one piece of simple advice about using abbreviations and acronyms. Whether in claims, responses, contractual letters, reports or any important communications on your project:

Do not use them….

at all…

ever!

Let’s look at a real-life example of why this is so important.

Our consultancy business, Hewitt Decipher Partnership, was recently appointed by a contractor. Our job was to prepare claims on behalf of the contractor for an extension of time and additional payment on a large project.

Read more


Avoid Construction Disputes

How Education and Training Avoids Disputes

I don't usually have much to say about education and training or attempt to promote our Claims Class courses through our blogs. But, this month I am going to make an exception and for good reason. Recent reports demonstrate that education and training will avoid time-consuming and costly construction disputes.

HKA’s report, Claims and Dispute Causation – a Global Market Sector Analysis and ARCADIS’s Global Construction Disputes Report 2019 are both pretty scathing. Both point to a lack level of knowledge exhibit when it comes down to contractual matters and claims.

Read more


COVID-19

COVID-19: Options for Contractors, Engineers and Employers

In my last blog, I discussed the effects of COVID-19 under the FIDIC Red and Yellow Books. Particularly whether contractors are entitled to claim for an extension of time and/or costs.

My advice was just a few weeks ago. At that time, some contractors were anticipating delays. Firstly caused by supply chain problems associated with plant, goods or materials sourced from China. Secondly by the travel restrictions which were in place. My thoughts were that,  the Contractor will be entitled to an extension of time provided he can demonstrate delay to the Time for Completion and/or the incurrence of Cost. He may also be entitled to claim for additional payment for Cost incurred.

Read more