1 LUMP SUM CONTRACTS IN KEEPING WITH THESE PRIORITIES, THE CONSTRUCT...

In keeping with these priorities, the construction contract in an EPC/tumkey

project is typically a lump sum, fixed price contract: that is, a contract in

which the price is fixed at the outset and stated as a single sum, albeit that it

may be, and usually is, payable in instalments as the work progresses. There

may, as we have seen with the Silver Book, be provisions in the contract for

payment of additional sums in certain defined circumstances, but the contract

price will be a fixed lump sum.

Fixed-price lump sum contracts are not confined to EPC or turnkey pro-

jects. They can be used where the works are designed by or on behalf of an

employer, or where the contractor designs all or most of the work without

being an EPC contractor. Fixed-price lump sum contracts tend to be used

where the employer or owner wishes to have maximum certainty of cost at the

outset and where the contractor is prepared to agree a fixed price because the

works have been defined, either by himself or others, with sufficient certainty

at tender stage and he has been able to investigate (and allow in his pricing

for) relevant risk factors.

As well as fixed-price lump sum contracts, there may be contracts that

specify a lump sum which is not fixed in advance but is to be determined only

International Construction Contracts: A Handbook, First Edition. William Godwin.

© William Godwin 2013. Published 2013 by John Wiley & Sons, Ltd.

after the work has been measured on completion. In many projects in which

the contractor is asked to tender on the basis of specifications, drawings and a

bill of quantities the actual price will be determined when the work has been

measured after completion. The main advantage of this for the employer is

that it enables work to begin at an earlier stage than the detailed construction

stage, and allows for considerable room for variations in the quantities actu-

ally required (as against those estimated in the bill of quantities). In such a

project, the unit prices for the quantities are typically fixed and stated in the

contractor ’ s tender.

The main disadvantage of such a remeasurement type of contract from the

employer ’ s point of view is that there is less certainty of eventual project cost.

On the other hand, the contractor will have less need to inflate his price by

building into it excessive contingencies. In this type of contract, the employer

trades off an earlier start to the work with perhaps a lower initial price against

the risk of greater actual cost when the project is completed.

Lump sum contacts are, therefore, of different kinds. They might be fixed-

price contracts or subject to remeasurement; they might be used where the

contractor is responsible for design; and also where he tenders against designs

prepared by others. Each case represents a different combination of risk and

advantage to the employer and the contractor.