ADDRESSING ISSUE IN LUMP SUM CONTRACT AGREEMENT

Making Change Order (Variations) Calculations for Lump Sum Contracts

The construction sector frequently experiences deviations during the construction stage, despite the efforts made during the design development phase. Although the expert consultants invest a lot of effort in the early stages of the project in studying the client's needs and developing the design to match the anticipated functional benefits, changes are frequently made during the execution. The main causes of variances are the shifting demands of the client and the challenging nature of construction projects.

Hence, in the event of changes, the contract's parties must determine the worth of the modified works and amend the contract's value as necessary. When compared to a lump sum contract, the assessment for a remeasurement contract is significantly simpler because the contractor is only paid for the work that is ultimately completed on-site. Yet, both remeasurement and lump-sum contracts must account for the loss of profit if the scope of work is omitted. Also, if the amount of varied work is large, the adjustment of unit rates may need to be taken into account.

Since the quantitative risk lies with the contractor, the contractor must set the price for the quantity covered by the contract, that is the price as shown in the specifications and drawings, regardless of the accuracy of the Bill of Quantities (BOQ). BOQ is only a benchmark for milestone payments. If the quantity reported in the BOQ is incorrect, the contractor adjusts rates to cover costs before signing the Contract Agreement. Therefore, in the case of a Lump Sum Agreement, the Contractor shall be deemed to have priced adequately for the entire scope of work, regardless of the items and quantities specified in the BOQ.

?What if an element exists in the BOQ but is not in scope and therefore not performed by the contractor at all?

In a lump sum contract, the contractor is considered to have set the price for the scope of work specified in the drawings and specifications, rather than simply based on the BOQ. In addition, in the case of a lump sum contract, the principle that the parties are bound by the contract amount makes the contractor entitled to payment for BOQ items that are not included in the scope of work.

However, contractors are vulnerable to getting paid for such elements if they are not too related to the scope of the project. The burden of proof lies with the performer. He must prove that the amount of such unrelated items should cover the cost of other items performed on-site. If the court determines that the amount indicated in the unfulfilled items is purely the contractor's profit due to the negligence of the business owner, it is difficult to change the position of the contractor.

On the other hand, if the contractor really made a careless mistake and therefore the amount mentioned in his offer is far lesser than the correct figure, can the employer enjoy the benefit because of the contractor’s real mistake?

The general principle is that a party cannot get benefit merely from the mistake of other parties and so the competent court may ask the party to compensate reasonably if that goes as a dispute resolution. However, the employer may raise his argument that he would have gone for another bidder had this particular contractor not made a mistake in calculation and ended up with a high contract price (offer). So, the employer’s decision on the selection of a suitable contractor in both cases needs to be analyzed like

1. what if this particular contractor did not make a mistake in calculation and submitted a higher offer and
2. What if this particular contractor submitted a lower bid (than expected) due to a calculation error?

Employers may express concern that if they had submitted a higher bid, they would have chosen a different contractor because the current contractor was not miscalculated. It could also be argued that the contractor may have intentionally offered a lower price to increase the chances of winning the bid.

Therefore, the contractor's claim for compensation for errors is easily weak however, the party that presents its argument convincingly and reduces the burden of proof wins.