The lump sum contract associated with
construction particularly in the one of the Project in Indonesia has created
untold misery to contract administrators and quantity surveyors working in
project management, supervision, contractor and employer. 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. Initially the
project were Lump Sum tendered based on Bill of Quantities and upon
finalization of contract both the Employer and Contractor have agreed to
convert the contract to a lump sum contract based on drawings and specification
with modified method of measurement for interim payment process.
In principle, 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 deliverable 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:
1. Provisional
Sums
2. Items
using Prime Cost Sums
3. Provisionally
described items
4. Provisionally
measured items
5. Nominated
Sub-Contractor items
6. Nominated
Supplier items
7. Contingencies
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.
In a lump sum contract, the
specifications and drawings are used to describe and identify the scope of
works. BQ (or Schedule of Rates) does not use for this purpose and it is used
to value variations and often times used for interim payment valuations.
My point is in a lump sum contracts,
BQ does not use to describe or identify the scope of Works. The BQ is a tool we
use in a lump sum contracts to calculate the Tender / Contract Price. The scope
of Works is defined in the Specifications and Drawings. The Contractor’s
obligation is to complete the Works in accordance with the Specifications and Drawings.
The BQ may contain items which are not required to accomplish the Contractor’s
obligations under the Contract.
However, the Contractor should execute
any works defined in the Specifications (in most cases Specification takes
precedence over the Drawings) even though such works are excluded from the BQ
(and/or not shown on the Drawings).
It can be considered that, after the
award, the BQ is used only for the purposes of valuation variations and interim
payments, unless BQ contains provisional items which are subjected to
re-measure. Further, in lump sum (without
quantities) contracts, BQ is replaced by Schedule of Rates.
In conclusion, I am in the opinion
that, in a lump sum contract, you can’t simply negate payment for any item in
the BQ which are not defined in the Specifications and/or shown Drawings, as
the BQ does not identify or describe the Scope of Works.
Under the doctrine of restitution no
one is entitled to receive any payment for what he is not entitled for under a
contract and the converse is also true that the employer cannot escape from
paying a contractor his rightful dues under a contract.
Credit to Dr Haris Deen for the above-mentioned article.
