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.

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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.


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.

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Payment for Work Not in Accordance with the Contract

A former Claims Class student asked my advice on a matter which I thought would be an interesting case study to share. The Contract conditions are FIDIC and the question around non-payment of work which was not in accordance with the contract.

Background

Each month the Engineer makes deductions in the payment certificate for Non-Conformance Reports under Sub-Clause 14.6 (Issue of Interim Payment Certificates), sub-paragraphs (a) & (b).

The Contractor does not contest the Non-Conformance Reports. They state that the defects will be rectified. A problem being that this is likely to take some time to achieve.

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