By Dr. Haris Deen | January 15, 2011
The lump sum contract associated with construction particularly in the Middle East has created untold misery to contract administrators and quantity surveyors working in every sector of the construction industry. The problem is caused by a misunderstanding of the concept of lump sum contracts and the application of the principles associated with such forms of procurement.
A lump sum contract is an agreement pursuant to which one party consents to pay another party a set amount of money for completing the work or providing the goods described in the agreement. Typically, lump sum contracts do not require contractors to provide a detailed breakdown of costs. Rather, the payment of the total contract price is linked to the contractor completing all of the work specified in the contract. For example, a software installation company may enter into a lump sum contract for installing multiple data processing systems in a building. Instead of receiving an individual fee for each system installed, the company will receive one fixed amount after it finishes installing all of the systems.
Lump sum contracts are regularly used for a variety of transactions, including construction work, consulting projects, and architectural assignments. A lump sum contract is easy to manage since payment is made only once. Generally, the lump sum contractor is paid a flat amount of amount of money after the party receiving the services or goods is given the output. For instance, under a lump sum arrangement, an architect firm is usually paid its total fee once it has supplied all the deliverables acceptable to the Employer.
The construction industry often engages in lump sum contracting. In most cases, the building owner signs a lump sum agreement with a general contractor. The general contractor then enters into separate agreements with subcontractors.
The explanation so far seems simple. Then what seems to be the problem?
The problem arises out of two major factors:
- The written contract;
- Understanding and interpretation of the written contract.
A lump sum contract is usually a written agreement, although an oral agreement may be binding in some cases. Once the contract has been signed, all parties are bound to adhere to its terms. A lump sum contract ordinarily details the fixed total amount to be paid to the contractor and the timeline for payment. If the contract is for services, a comprehensive description of the scope of the services to be performed by the contractor should be documented. Contracts for goods should thoroughly detail the goods to be provided, including the components, features, and characteristics that must be a part of the final deliverable.
However, all this is dictated by the terms contained in the various documents being made part of the contract. Construction contracts using standard forms like the JCT, NEC, FIDIC etc., detail a hierarchy of documents that would be referred to in the settlement of disagreements or disputes. Such documents may include the specifications and a bill of quantities amongst other things. If the bill of quantity is listed as a contract document, it is possible for the Employer to require the contractor to execute everything it has priced for in the bill.
It must be noted that a bill of quantity can contain one or more of the following items in addition to the lump sum items:
- Provisional Sums
- Items using Prime Cost Sums
- Provisionally described items
- Provisionally measured items
- Nominated Sub-Contractor items
- Nominated Supplier items
Despite described as a lump sum contract all the above items are subject to adjustments and additions to and deletions from the bill of quantities is possible if the contract provides for variations, but no re-measurement of quantities stated in the bill of quantities will be allowed.
As a rule, construction contractors are not entitled to receive more money than the contract specifies. Items required to complete the works must generally be provided even if they have been omitted from the bill of quantities – (Williams v Fitzmaurice (1858) 3 H&N 844). Michael O’Reilly points out that if there is no mechanism in the contract for receiving payment for these extra items, the contractor will have to pay for them. This means that the contractor will have to provide what is indispensably required to fulfil its obligations under the contract.
If it is presumed that quantities do not form a term in lump sum contracts unless the contract states otherwise, the contractor will not be paid any additional payment if the quantities required to be executed are greater than stated in the bill of quantity, (Portman and Fotheringham v Pildritch (1904), Priestly v Stone (1888), Re Ford and Bemrose (1902) CA, Sharpe v San Paulo Railway Co (1873) LR 8 Ch App 597). It could therefore implied that the reverse is also true – being that if the quantities stated in such a bill of quantity are greater than what is required to be executed (as long as the item description is not changed) the contractor will be entitled to receive the full payment against that item.
Can the Employer or Engineer therefore, change the description of an item in the bill of quantities where the quantity has been over measured and attempt to re-measure and obtain the lesser quantity? Unless the contract provides to do so, definitely not! Any attempts to do so would mean introducing an element of re-measuring where the contract does not provide and this would be in breach.
In the same context, what about an item contained in the bill of quantities which is not required to be executed? Contractors always argue that being a lump sum contract they are entitled to be paid for every item in the bill of quantities regardless of requirement in the same manner that the Employer is entitled to insist upon the contractor to provide items required but missed out in the bill of quantities and that each balances with the other. In order to prove this point the contractor will need to establish that the price it has put in for such an item is in actual fact to compensate for some item missed out in the bill of quantity. The burden of such proof will rest with the contractor.
O’Rielly, Michael – Civil Engineering Construction Contracts