Claim for Increased Costs on a Fixed Price Contract
Are there circumstances whereby a contractor may claim increased costs of materials on a fixed price contract? As usual, this would depend on the particular contract, but if we take FIDIC as an example, yes there are.
Consider the following situation:
- The Contract duration is two years.
- The structural work contains large quantities of concreting which is all programmed to be completed within the first 8 months of the project.
- In the last six months of the project, the Engineer instructs a Variation which requires substantial additional concrete works.
- Since the beginning of the Contract, the cost of ready-mixed concrete and reinforcement steel have increased substantially.
Sub-Clause 13.3 (Variation Procedure) states that variations should be evaluated in accordance with Clause 12 (Measurement and Evaluation).
Sub-Clause 12.3 (Evaluation) states that:
‘For each item of work, the appropriate rate or price for the item shall be the rate or price specified for such item in the Contract …. However, a new rate or price shall be appropriate for an item of work if: …
(i) the work is instructed under Clause 13 (Variations and Adjustments)…
(iii) no specified rate or price is appropriate because the item of work is not of similar character, or is not executed under similar conditions, as any item in the Contract.’
The work was instructed as a Variation so its qualifies for a new rate or price.
The concrete work included in the Variation was not executed under similar conditions as the concrete work included in the Contract, because it was carried out approximately 16 months after the concrete work included in the Contract was completed and at a time after which the prices had increased so under this provision, it also qualifies for a new rate or price.
The Contractor should therefore be compensated for the increased price of materials.
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Hello
We are manufacturer and we are receiving POs for 5 months in advance, right now we can’t predict the prices and costs as it’s too vibrating and increasing every moment.
So how we should put it in the contracts or quotation that would be understandable and logical for the clients?
Thank you for your help
Glad I came across this discussion. As a contractor (in South Africa) we are currently in negotiations with a client for a BID priced almost a year ago. It is an EPC (Design & Build) contract – Silver Book FIDIC. This pricing before we knew the adverse effects on the economy due to COVID-19. Client is asking for savings. So basically the design team, on risk went more into the design phase recently and we produced a detailed B.o.Q’s and I priced it at current rates (June 2021). Thus all the contingencies/allowances we made last year for design development changes / and escalation etc is all but used up however we still in line with what we submitted last year. The thing is the client still wants savings of almost 6% and we have provided them with 3% as our first offer in these negotiations after producing the B.o.Q’s based on I would say almost a final design at this stage. The minor amount I still have now left for further escalation and contingences is only 2% (remember this is an EPC – lumpsum – risk etc). My final suggestion to them is that they get the 2% now as a further saving provided the final conditions of contract now include for a contract escalation clause. I am happy to do that, understandably, as in the long run it will be better than what I allowed. However what provisions does FIDIC allow for in terms of this. Can we not ask them to apply the Haylett Formula or what ever other Mechanism FIDIC uses. Note I am not too familiar with FIDIC as for building contracts in SA we traditionally use the JBCC. However this is a design & build, thus the client opted for FIDIC. Any guidance / thoughts are most welcome.
Many Thanks
If Contract period more than 18 months (2 years is not appropriate to Fixed Price Contract) then the changes must be expected in the costs of materials, fluctuation of the exchange rate and so on. The Contractor should estimate all risk prior to submit its price, agree with suppliers about the prices for construction materials, storaging of course be aware of perishable materials and so on in advance.
I think in this situation (Fixed Price Contract) the Contractor quotes in the form of new rates for the relevant items of work with reasonable prices and should demonstrate in the BOQs (actually, varied, revised, % of increased). Before sign the contract the Contractor should write the statement that if the price of items increase or decrease (in defined percentage say 1%) it will be calculated by formula agree with the Employer previously.
I would like to add that in order to win a contract some Bidders try to reduce financial price and then seek increasing the contract price through additional works/ scope of work, prices and so on that is why the employer should has competent engineer/project manager to reject or accept the proposal for variations.
Hi All,
My take is that you can only fix for the known quantities and period.
You cannot fix for the unknown.
The Contractor cannot be expected to carry this risk—more like funding the Client’s
Capex.—especially if the variance of actual to tender quantities is vast.
Teddy
Dear Ssemugenyi, how does your contract explain variations?
Currently am facing almost a similar challenge
The contract provided for7No. Engineers vehicles
The Engineer instructed we buy only 3No. Vehicles and now after 3 years into the project the Engineer says we buy 2 more vehicles and the cost price has almost doubled. Moreover we are in the prolongation period awarded at no extra cost.
Hello everyone;
I believe that the prices are fixed only for the quantities under scope of signed Contract. For these quantities the contractor most probably priced for the risk of price escalation. But; beyond the quantities of the initial scope of works the contractor has the full right to revise his prices if; as said in the case; the price of reinforcements and concrete escalates.
Thank you so much
Abdeljalil Agourram
I think the payment for the increment in material does not arise because the essence of a fixed price contract is that the contractor prices higher taking care of such risks like fluctuation of costs. Further more, the issue of “similar conditions” does not apply since the variation was issued within the original contract period (6months to end). So the payment for variation would still be based on the contract rates .
This is, and always will be, a contentious issue for the Contractor when extension of time is awarded. In my experience, the Engineers always referred to the fixed contract and that was the end of it. But what if the extension is more than a month, 3, 6 or even more than a year? FIDIC uses the word ‘reasonable’ more than 50 times in the Red Book, so shouldn’t the Engineer act reasonable if the extension of time constitutes actual cost increases which the Contractor couldn’t reasonably have allowed for?
I have been involved in a site where the initial 2 year contract duration was extended by more than a year due to Variations. The Engineer stood his ground and we ended up getting nothing extra, even the prolongation cost was based on the BOQ rates.
The Employer doesn’t want to pick up the tab for the very reason he decided to use a fixed contract. It is therefore the Engineer’s duty to bring fairness to the table, but they are also trying to keep their client happy. So it is possible to be compensated, but not likely.
As a Contractor, would you also agree to the same logic if the market price had halved?
AL, yes personally I would, albeit with some degree of sadness at losing ‘the cream’.
Receiving lower value for the same work is not unheard of. It happens when indices reduce in Price Fluctuation formulae as we all know. I am sure a lot of readers will have observed negative PF factors due to the reduction in fuel and bitumen indices for example.
In this specific example, you raise an interesting point. In your scenario, it would the Engineer / Employer seeking a price adjustment (downwards) and in a lot of cases I would expect the Contractor to resist by taking the view I outlined as likely to be taken by the Engineer in the original post.
But, if the Contractor had a good relationship with Employer, and future business was intended, a pragmatic approach would be worth considering. Costs have reduced, an appropriate margin can in theory be obtained, and a final (reduced) sell rate could be offered to the Employer via the Engineer.
This opinion of course is taken in isolation to the remainder of circumstances which would prevail on any real contract.
I agree with Tony.
However the set example set above might not be exactly right. Most Engineers will consider all ” Concrete” should have the same rate and being executed under similar conditions ( Let alone the time frame ). On the other hand most contracts deprive the Contractor of his right towards any increase in material specially Concrete and steel
I tend to agree with Tony on this. A contract mechanism to deal with fluctuating material costs is recourse to a price escalation formula and for a contract duration in excess of 1 year the Contractor should have negotiated for inclusion of such a provision during the tendering phase. Otherwise ‘Fixed Price’ means what it says and the Contractor has taken the risk of any increase in those material costs, ‘similar conditions’ does not mean similar ‘economic’ conditions in my view. During the Dubai boom years many Contractors without any escalation adjustment got caught by the huge surge in commodity prices so for any contract formed afterwards the Contractor knows and must factor in this risk or press for a price escalation regime when submitting its bid.
I once had a variation which instructed work to be performed 25km away from the Site at the existing contract rates, this was clearly not similar conditions but the Employer argued that the excavated material was similar to that on Site so the existing rates should apply!
As a Contractor I agree with this.
Although I expect many Engineers will respond that when bidding, the Contractor (as the bidder) knew what the contract duration would be and should have made due allowance in this prices, since price fluctuation did not apply.
Further, I find that many Engineers will understand the ‘similar conditions’ to refer to technical characteristics (for example the original concrete was all at ground level, the later concrete was all at height), and will not consider impacts related to timing of the concreting to be covered by this wording. I appreciate the example I have used should fall within the scope of ‘similar character’ but my point is that I believe the Engineer will not consider ‘conditions’ to cover time. Other opinions on this matter would be of interest.