3 Types of Construction Contract
We have been looking so far at the different ways in which risk is allocated in traditional and in turnkey projects and contrasting in particular the ‘balanced’ approach to risk in the FIDIC Red and Yellow Books with the ‘one-sided’ risk profile of the Silver Book. We suggested that these different risk allocations are a consequence of the very different dynamics applying to turnkey-type projects, in which the financial pressures involved operate to make achieving performance on time and to budget paramount.
3.1 Lump sum contracts
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 projects. 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 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 actually 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.